Monday's Opening View
By Al Schwartz (aschwartz@sir-inc.com)
4/1/2002 8:30 AM ET
Mind you this is no April fools piece in reference to my return. My weeklong absence from this forum was the result of some nasal surgery and, as you can see from the picture above, it was no minor task. So as I attempt to shrug off the veil of an opiate induced cloud of ignorance, please bear with me as I attempt to reassemble a look at the markets. One thing for certain, I am now breathing a lot better than many market participants.
First, a look at the last week of the month as well as the close of the first quarter. The three major averages closed mixed ahead of the long weekend and unanimously lower on the week. The Dow Jones Industrials (INDU – 10403.9) lost 23 points (0.22 percent) on Thursday which was enough to ensure a 23.8 point (0.20 percent loss) on the week. The index attempted to recoup losses from the sell-off that began on March 20, but mid-week buying was insufficient to move the group back above its 10-day (10469) and 20-day (10500) moving averages nor to prevent their bearish cross. On an intermediate term chart the INDU continues to trade comfortably above its upwardly trending 10-week (10174) and 20-week (10073) moving averages. The 10-month (9920) has now been mastered for the second consecutive month and the 20-month (10307) moving average has been conquered for the first time since last May.
The INDU closed out the first quarter of the year positive by 3.82 percent but with an absence of trend. Backing this premise is the fact that the INDU has only strayed from its mean (of the January 30 low of 9443 and the March 8 high of 10729) by 6.38 percent. Exemplary of a trend would be the recovery out of the 1998 decline. The averages experienced a 15.9 percent deviation from the three-month mean (October 18,1998 low of 7400 and the January 8, 1999 high of 9759). The 10,500 level seems to be the site of chart congestion (offering both loose support and resistance) and hence its action around this level may be key heading into the future.
The S&P 500 Index (SPX – 1147.39) managed to gain 2.81 points (0.25 percent) on Thursday and posted a "why bother" 1.31 point (0.10 percent) decline on the week. Like its venerable and widely followed brother, the SPX has seen its 10-day (1151.84) moving average move below its 20-day (1153.79) moving average. Once again the group has proven its inability to clear (on a meaningful and sustained move) the 1150 level. As we have mentioned in the past the SPX has had tremendous difficulty in the 1173-1176 area. The 10-week (1130.40) and 20-week (1138.27) moving averages are still bearishy configured, but the index has managed to establish its fifth consecutive weekly close above both trendlines. On a long-term chart, the SPX has closed out its first month above its 10-month (1134.19) moving average since August 2000. The 20-month (1231.61) is poised some 7.3 percent above current levels and continues to bear downward to greet any advances. For the quarter the SPX is down by 0.06 percent. The SPX has also been fairly contained in the first quarter, deviating from its mean (based upon the January 7 high of 1176.95 and the February 20 low of 1074.35) by just 4.6 percent. Using a three month period as the index reversed its 1998 slide, the deviation from the mean was 16.1 percent (using the October 8, 1998 low of 923.32 and the January 8, 1999 high of 1278.04).
Finally the worse performer of the triad, the Nasdaq Composite (CPMP – 1845.40) garnered the most attention on Thursday gaining 18.6 points (1.02 percent) but showed the greatest percent decline on the week (losing 0.30 percent or 5.9 points). Friday's advances failed to pull the group above its 10-day (1848.80) and 20-day (1863.04) moving averages that bearishly crossed earlier in the week. The COMP has now made three consecutive weekly closes below both its 10-week (1849.50) and 20-week (1907.35) moving averages. As the first major index to close above its 10-month (1857.37) in December racing off of its post-September 11 lows, the group has been beleaguered by earnings shortfalls and its methods of reporting them and has failed to maintain that premature enthusiasm. The COMP is now some 19.5 percent below its 20-month (2294.12) moving average.
Closing out the first quarter, the COMP finds itself 5.38 percent in the hole. The group has been more volatile than its two companions, trading some 10.6 percent from its first quarter mean (The January 9 high of 2098.88 and the February 22 low of 1696.55), but the bias has been toward the downside. Using the post-1998 decline again, the strong upsurge in the COMP had and impressive 27.2 percent deviation from the mean (what a great time to be trading these stocks!). We established these perimeters using the October 8, 1998 low of 1357.09 and the January 8, 1999 high of 2369.55, the trend was definitely upward.
Oh, so here is where I get myself in trouble (I can still blame it on the medications). On Thursday the CBOE Market Volatility Index (VIX – 19.32) closed at its lowest closing level since closing at 19.28 on August 31, 2000. The VIX measures the premium implied in the current pricing of stock options (the market's expectations of future price moves). When there is perceived risk in the market, the VIX rises. When there is very little perceived risk, the VIX drops. Now for the longest time, I started to believe that the VIX was possibly seeking lower levels of "normalization." So I crunched some figures (possibly a futile exercise in placing some perspective on the apparent complacency exhibited by this gauge of investor fear. I took a look at the S&P 100 Index (OEX – 577.87, +0.07 percent) since the VIX is calculated using near-the-money options on this index. Using the same "deviation from the mean" as mentioned above, the OEX experienced a 16.7 percent deviation from the mean during its rise out of the 1998 sell-off. During the same period the VIX swung more wildly from its mean by 51.63 percent The VIX deviated by over three times that of the OEX. The bias in the VIX was toward the upside as the OEX did indeed climb higher on this wall of worry. Looking at the first quarter in each, the OEX deviated by just 4.88 percent from its mean while the VIX traversed 22.64 percent around its mean. This time around the OEX is climbing nowhere and the VIX has a penchant of moving lower. Also note that the VIX is gyrating about 4.6 times that of the OEX. I would conclude from these two circumstances that investors are becoming more irrational and trading their latest whims.
Secondly, I looked at the average VIX readings in two market environments. During the Bull Run from October 1998 through the OEX peak in March 2000, the VIX averaged 25.66 (on a closing basis). From that peak through this past Thursday the VIX averaged 26.93. This amounts to just a 4.95 percent differential in the bear market environment as compared to the bull market backdrop. In the early 1990's the VIX seemed content to carry out its exploits below 15 with just an occasional burst of fear above that range. In early 1996 the VIX decided to experience life on the wild side and test that level as support. It then proceeded to move to higher levels, climaxing this past September. The trend ever since has been lower. Take away from this discussion what you will, but I feel a reversion to the mean is likely. I just do not know when.
Two things that have been grabbing my attention of late are all of the insider selling (not much buying here) and a lot of new offerings (stock issuance and convertible bonds). Who should have a better grasp of their company's health and potential growth than these insiders. I also see little talk of Corporate American offering up plans to increase Capital Expenditures (CapEX). You may want to focus on who is buying. Also remember that when two few buyers are chasing too many shares, the price declines. You can still profit in this market both long and short, just be aware of your environment.
Below I have assembled the ten best and ten worse performing U.S. sectors of the first quarter using Dow Jones groupings. For a more comprehensive list, see Bill Bruns' observation A Look at First Quarter Sector Performance:
Ten Best-Performing Industries:
Precious Metals Index 40.49 percent
Nonferrous Metals Index 29.57 percent
Mining Index 25.50 percent
Aerospace Index 19.24 percent
Containers & Packaging Index 18.84 percent
Auto Parts Index 18.84 percent
Lodging Index 17.75 percent
Distillers & Brewers Index 16.12 percent
Tobacco Index 14.26 percent
Household Products, Durable Index... 14.20 percent
Ten Worst-Performing Industries:
Wireless Communications Index -43.67 percent
Telecommunications Index -16.65 percent
Communications Technology Index -16.02 percent
Computers Index -12.79 percent
Fixed-Line Communications Index -12.73 percent
Pollution Control Index -12.52 percent
Biotechnology Index -12.02 percent
Electric Components & Equipment -11.40 percent
Industrial, Diversified Index -10.90 percent
Software Index -10.76 percent
Please remember, that just like mutual funds or fund managers, what was hot may not continue to be so and the dogs can get up off of the mat. Do your homework.
Just in case you missed Friday's release, U.S. Personal Income increased by 0.6 percent in February, surpassing estimates for a 0.3 percent rise and posting its largest rise since December 2000. Personal Spending matched estimates with a 0.6 percent increase.
As a prelude to the release of the March Institute for Supply Management Manufacturing Index (last 54.7, expected to slip slightly to 54.0) today after the market open, the Chicago Purchasing Management showed an improvement in March to 55.7 over February's 53.1. New orders rose to 62.5 compared to 59.5 in February, the highest reading in over two years. Jobs seem to be the laggard of the report. Despite rising to 43.1 in March from 36.3 in February, its is still less than the 50 mark that divides expansion from contraction.
We are still in the twilight area between earnings warnings and earnings releases. Although the schedule of releases will be light this week, the season officially starts this Friday when Alcoa (37.74, -0.13 percent) enters the confessional. In the mean time keep a heads up on corporate guidance. According to the Dow Jones Newswires the Price-to-Earnings ratio (P/E ratio) on the SPX as of Thursday's close was 46.08 based upon trailing earnings. One year ago the P/E stood at 22.41. Its is now up to corporate American to justify those valuations.
Equity option activity on the CBOE this past Thursday had 227,508 put contracts trade compared to 325,461 call contracts. The resultant 0.699 put/call ratio has the 21-day moving average moving sideways at 0.603.
In futures trading, the June contracts on the SPX, INDU and the NDX have been trading below their respective fair value numbers with no trend indicated. Volume seems rather light and the chart pattern is quite spastic. This would seem to indicate a negative open for the first session of the second quarter. At this point in time session lows and highs: SP/M2 (1139.50/1146.40), DJ/M2 (10337/10358), and ND/M2 (1428.0/1454.0).
Overseas markets by in large have extended the Easter holiday on this "Easter Monday." As such we have neither a confirmation nor a refutation of a lower start in the states. Overnight the Tankan survey of Japanese business sentiment was said to confirm that the Japanese economy has hit bottom (possibly more spin than fact). The business diffusion index of large manufactures came in at minus 38, matching the prior read but below consensus estimates of a minus 35. Empirically, the index measures the percentage of business that feel that there business conditions are improving less the percentage of companies that feel their environment is bad. The large manufacturers forecast pretax profits will jump by 36.8 percent in fiscal year beginning today. This would represent a marked improvement over the 45.1 percent decline suffered this past fiscal year.
The U.S. Dollar Index (DX/Y – 118.73) added 18-cents on Thursday and managed to hold its 20-week moving average. The 117 level seems to have offered support for the six-session rally. Potential resistance may enter the game around 119. Early trading today has the U.S. dollar trading mixed:
Currency/ Last/ Change
Euro/ 0.8738/ 0.0034
British pound/ 1.427/ 0.0028
Japanese yen/ 1.3360/ -0.0055
Brazilian real/ 2.3250/ 0.0004
Mexican peso/ 9.9980/ -0.1096
Canadian dollar/ 1.5997/ -0.0024
The June future contract on the 30-year bond (US/M2 – 98'05) gave up 27/32 on Thursday as its continues to display fears at heights over 99. The 20-day moving average is rapidly moving into this area and has capped all closes since the first of March. A continuing flood of positive economic data has seen the contract drop 4.62 percent this past month. The yield on the 30-year bond has moved from 5.416 percent to 5.796 over that period. At the shorter end of the curve, the two-year note has seen its yield move from 3.18 percent to 3.70 percent (remember as prices decline yields rise). Since there is no overseas trading in the fixed income markets, we offer a look at Thursday's closing numbers:
2-year note closed at 99-26/32 unchanged to yield 3.70 percent
5-year note closed at 94-20/32 down 7/32 to yield 4.81 percent
10-year note closed at 96 down 14/32 to yield 5.40 percent
30-year bond closed at 94-2/32 down 17/32 to yield 5.80 percent
The yield curve, as measured by the 2-30-year yield spread, closed at 210 basis points, down from the prior close of 218 basis points.
The May future contract on sweet crude oil (CL/K2 – 26.31) spiked by 44-cents closing above the $26.00 level for the first time since September 19. The rally was sparked by inventory data released on Tuesday showing a larger than expected draw down in petroleum inventories. The American Petroleum Institute (API) showed a decline across the complex with crude falling by 6.217 million barrels. Inventories are expected to show further declines as refineries ramp up gasoline production for the summer driving season. In early trading today the contract moved as high as $27.40 as tensions in the mid-east heat up. Currently the contract is up 60-cents at $26.91.
This week's economic calendar:
Monday
10:00 a.m.: February Construction Spending (last plus 1.5 percent).
10:00 a.m.: March Institute for Supply Management Manufacturing Index (last 54.7).
Tuesday
9:00 a.m.: BTM-UBS Warburg Chain Store Sales Index for the week of March 30 (last minus 0.6 percent).
9:00 a.m.: Redbook Retail Sales for the week of March 30 (last minus 0.8 percent).
10:00 a.m.: February Factory Orders (last plus 1.6 percent).
10:00 a.m.: March Challenger Layoffs (last minus 40 percent).
8:45 p.m.: Kansas City Fed President Hoenig speaks on monetary policy at economic forum in Wichita, Kan.
Wednesday
7:00 a.m.: MBA Refinancing Index (last plus 3.2 percent).
10:00 a.m.: March Institute for Supply Management Non-Manufacturing Index (last 58.7).
12:30 p.m.: Chicago Fed President Moskow speaks at the World Affairs Council of Greater Cincinnati Global Forum luncheon in Cincinnati.
Thursday
8:30 a.m.: Initial Jobless Claims for the week of March 30 (last plus 18,000).
10:00 a.m.: DJ-BTM Business Barometer (last minus 0.5 percent).
12:30 p.m.: New York Fed President McDonough speaks to the Asia Society in New York.
12:30 a.m.: Richmond Fed President Broaddus speaks at Chamber of Commerce luncheon in Charleston, S.C.
1:00 p.m.: St. Louis Fed President Poole speaks at Lambuth University in Jackson, Tenn.
3:00 p.m.: March Treasury STRIPS Data.
4:30 p.m.: Money Supply.
8:45 p.m.: Kansas City Fed President Hoenig speaks at an economic forum in Kansas City, Mo.
Friday
8:30 a.m.: March Non-Farm Payrolls (last plus 66,000).
8:30 a.m.: March Unemployment (last 5.5 percent).
9:40a.m.: March ECRI Inflation Gauge (last 98.6).
3:00 p.m.: Chicago Fed President Moskow speaks on the economic outlook and globalization at Lafayette College in Easton, Pa.
3:00 p.m.: February Consumer Credit (last plus $12.8 billion)
5:15 p.m.: Kansas City Fed President Hoenig speaks at 2nd Annual Missouri Economics Conference in Columbia, Mo.
Earnings expected today with current estimates:
APW Ltd. (APW) 2Q (.27)
MTR Gaming Group (MNTG) 4Q .11
Pharma Resources (PRX) 4Q .55 came in at 0.50
Seitel Inc. (SEI) 4Q .34
Description of Fair Value |
