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Capital Markets Recap
June 5, 2009
Last Friday’s dispatch included a graph and a brief discussion of the narrow band within which the S & P 500 has traded (click here to see that chart), and that I expected a June resolution of it; I just didn’t expect a resolution of it on June 1. You can see the breakout in the chart below.
The breakout was important for more than just the May trading range. The breakout also exceeded the 200-day moving average, a level of technical importance. Indeed, our Ned Davis Research service boosted the recommended equity exposure to maximum because of the significance. In their note on the subject, they indicated that violating the 200-day was most significant when the moving average was heading downward. Had prices remained in the trading range for the next several weeks, the 200-day would have naturally flattened out, especially as prices from a year ago (about 200 trading days) successively fell off the moving average calculation. Now, however, with prices above the moving average, it will flatten out much more quickly and even begin to turn up. Many consider the 200-day moving average to represent the overall trend of the market.
Alas, while Ned Davis, the man, is a personal favorite of mine–’sat beside him at a conference once and was surprised to find he’s only of average height–I hate to rain on his balloon. We do need to, however, slap a couple of caveats on the event. First, the breakout occurred on relatively low-volume. (Click on the chart to enlarge).
That doesn’t mean it’s doomed to fail (i.e. fall back below), just that we should have less conviction in the breakout.
Second, it’s rare that it’s a one-time affair; that is, there’s usually a battle between buyers and sellers. This time it happened almost too easily–sort of like in a horror movie where some clueless character reaches down to pick up a clue and you almost scream look-out-for-the-claw-hammer-you-moron-you’re-about-to-get-your-skull-dented-in! Note in the chart below how the 200-day moving average serves as support (up arrows), with prices not falling below the moving average until after a number of attempts. Even then, the moving average is tested from below (last yellow arrow). It then serves as effective resistance (last yellow arrow). From here, we need to see some testing of the 200-day, and a little volume confirmation would be nice.
Until I can figure out how to make a table of data appear legible, I’m going to have to go with the following, inelegant work around. You might notice that it was all about Beta (click here for definition) in U.S. markets this week, as the highest Beta group (Russell 2000 – small cap stocks) outperformed the lower Beta mid cap index, which outperformed the lowest Beta large cap indexes.
Here’s my best guess for the next couple of weeks.
The dollar is oversold, so the past of least resistance, the one that stymies the most people, is a reversal. Therefore, the dollar rallies. (Keep in mind that dollar action always unfolds relative to other currencies. I report the trade-weighted dollar here. I expect a rally in it.
Treasury yields are overbought; conversely, Treasury prices are oversold. Therefore, Treasuries rally.
Stocks have moved inversely with the dollar of late, and the rally in the dollar will lead to stocks selling off. That will set us up for a [hopefully] successful test of 200-day moving average support and will also remind us of the importance of Nonfarm Payrolls as a trend change date.
If I was forced to go on–oh, why not–I’d say that any correction is likely to be pretty shallow as so many underinvested hedge/pension funds and others will be anxious to put money to work on any pullback. There’s a chance that the correction could be more serious, given that seasonality is no longer in the market’s favor (i.e. we’re in that sell-in-May-and-go-away time period.)
Here are a couple of concerning charts from sentimentrader (learn more here). I don’t mean to bring you down, but forewarned is fore-armed, or something like that.
I might have pointed out this before, but Rydex fund traders (Rydex caters to rapid-fire mutual fund traders) tend to get things all wrong, jumping on trends as they’re about to end, etc. In short, they are the dumb money. Those traders set another record for the amount of assets in Rydex’s bullish technology funds–both the unlevered and levered varieties–as the chart below atests. Please notice how the previous peaks in the bottom two plots line up with peaks in the NASDAQ.
Next, as investors get more confident in market action and, in turn, their own greatness, they typically take on riskier bets. One way to do that in the average TD Ameritrade account is by buying stocks with seemingly higher risk/reward profiles, and what stocks can one buy more of than penny stocks. The positioning of investors in that arena is not especially promising either, as the following chart illustrates.
Running out of time this Friday afternoon, having completed the other sections of this dispatch first. I only have time for some key bullet point headlines (in italics) from the Bloomberg terminal and the usual witty comments that capture the essence of all you need to know.
Traders Begin to Speculate Fed May Need to Raise Interest Rates This Year. Nope. Won’t happen. Bad bets.
Initial Unemployment Claims in U.S. Decrease, Signal Worst of Slump Ending. We tend to be an optimistic lot, and this might be the case here, were it not for the “worst” part.
Bernanke Warns U.S. Budget Deficit Threatens Nation’s Financial Stability. Undoubtedly, any of the six readers of this blog could have made the same statement months ago.
Hopefully, headlines like this one aren’t prologue: Ballmer Says Microsoft Will Move Jobs Out of U.S. if Obama Tax Plan Passes. And what does Steve Jobs have to do with Microsoft, other than pushing it off the pedestal.
[Yale Professor] Shiller Says Rise in U.S. Confidence a ‘Puzzle,’ Credits Obama’s Stimulus. Let me help you out, Bob: Here’s how it works.
If stock prices are the intersection of supply and demand, and if increased supply–ceteris parabis (economist speak for all other things equal)–results in lower prices, then headlines like these don’t augur well for stock prices: JPMorgan, American Express to Sell Stock as Condition of Repaying Treasury, and Rio Tinto Said to Consider $15 Billion Sale of Stock.
Since it’s the first week of the month, we were treated to the Nonfarm Payrolls report, and it was a treat at first glance. Economists expected another 520,000 jobs were jettisoned by employers in May. Instead, just 345,000 were cut loose, while the April number was revised, to the better, from -539,000 to -504,000. Meanwhile, the Unemployment Rate rose to 9.4% from 8.9% and above economists expectations of 9.2%. One has to go back to August 1983 to find a worse reading. On the dark side, Manufacturing Jobs fared worse than expected, worse than in April, and April was revised the wrong way. Whereas a loss of 150,000 manufacturing jobs was forecast, 156,000 were lost, and April’s 149,000 loss was revised upward to 154,000.
Anytime the payrolls number and the unemployment rate go the opposite direction, you can count on there having been a change in the labor force. Basically, some of the unemployed notice the improved tenor of the news and decide to enter the labor force; thus the employment rate relative to the expanded workforce (i.e. larger denominator) leads to an increase in the rate.
As you might imagine, we subscribe to a number of services, some of which are mentioned here frequently. One of the economic data miners we subscribe to is Greg Weldon. In today’s look at Nonfarm Payrolls, he comes away with a decidedly unpleasant view of the numbers, citing:
another drop in the year-over-year earnings rate
the duration of unemployment “soaring”
the “real” Unemployment Rate rising to 15.9%
Naturally, his last one stands out the most. The closest I could come to that was to look at the harshest measure of the unemployment rate, which is the Bureau of Labor Statistics’ U-6, the definition of which follows:
Total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers.
Marginally attached workers are persons who currently are neither working nor looking for work but indicate that they want and
are available for a job and have looked for work sometime in the recent past. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not looking currently for a job. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule.
Anyway, here’s a look at U-6. Unfortunately, it only goes back to 1994, so while it looks pretty bad, we lack perspective to the other period of frequent comparison these days, the early ’80s. As always, click to enlarge.
In an effort to show you how ridiculous it is that economists make forecasts, last week I laid out a–let’s call it a model to increase the sophistication for forecasting Initial Jobless Claims. Last week our guess was 620,000. At the time, no consensus estimate was available, but the economists came up with one . . . 620,000. The actual figure was 621,000, but last week’s data was revised upward–worse, that is.
Finally, the Savings Rate continued to climb. This is worrisome for some. While it doesn’t sound like a concern for individual consumers–and it isn’t–it could disrupt the notion that consumer spending will bring back the economy from the brink, as it has in the past. We’re back to a savings rate last seen in 1995 and not far below the post-1959 average rate.
Tuesday – for some reason, this week abounds with confidence readings, and while only Friday’s is regularly seen here, I thought the confluence of several intriguing. On this day, we the Investors Business Daily Economic Optimism survey and the ABC Consumer Confidence survey. If they’re significant, look for a comment next Friday or sooner.
Wednesday- Bloomberg’s Global Confidence survey is due out. This survey made a splash in May when it reached its highest level since its November 2007–an ominous date, indeed–debut (click here if you’d like to see it). Later in the day we get the Federal Reserve’s Beige Book, which reports on activity in all 12 of the Fed’s districts.
Thursday – Initial Jobless Claims are released. Economists expect that 615,000 claims or unemployment insurance were made. Our estimate will be for no change (621,000). Personally, I think the current spate of economic happiness is going to be short lived, but rather than proceed on feeling alone, I think it’s important to have some milestones. In the case of jobless claims–which is arguably one of the most-important, frequently-received data points we get–those milestones are recent highs/lows and for violations of them. For this week’s data, we’re watching 605,000 and 643,000.
Friday - University of Michigan Consumer Confidence is our fourth confidence survey of the week. Economists expect modest improvement in the first half of June (we get a final figure near the end of the month.)
Graig Stettner, CFA, CMT
Investment Management Services
Tower Private Advisors
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