Monday Morning Outlook: GE Powered Dow to Win, but Momentum May Be Stalling
Russell 2000 Index Slips Back Below 800
by Todd Salamone 1/22/2011 11:58 AM
schaeffersresearch.com
The market's momentum slowed last week, but the Dow Jones Industrial Average managed to notch another century marker on its belt, toppling the 11,800 level. Looking ahead, Todd Salamone, Senior Vice President of Research, was disappointed by the Russell 2000 Index's (RUT) retreat below 800, and he reviews some risk factors he sees looming. Next, Senior Quantitative Analyst Rocky White reviews the S&P 500 Index's (SPX) outperformance over the last several months, and notes several interesting technical milestones. The SPX concluded a 34-day ride atop its 10-day moving average on Thursday. A streak of that magnitude has occurred only four times since 1980. Meanwhile, the SPX has also spent more than four months above its 50-day moving average. As always, Rocky offers some insight into these developments. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: Apple, Google Bracket the Week With CEO News
Schaeffer's Editorial Staff
The wrestling match on the Dow Jones Industrial Average didn't really resolve itself in the bulls' favor until Friday, although it was clear by Thursday that the winning streaks on the S&P 500 Index (SPX ) and the Nasdaq Composite (COMP) were at risk. Economic and earnings reports were generally upbeat – IBM (IBM), Apple (AAPL), Google (GOOG) and General Electric (GE) all took star turns, while jobless claims declined and home sales rose. In the end, though, worries that China would try to cool off an overheated economic engine, along with a handful of sketchy bank results, slowed January's bull run to a crawl.
The market took a holiday Monday, but the news didn't. Apple announced that CEO Steve Jobs would take a medical leave for the third time since 2004. The company said Jobs will continue to be involved in major strategic decisions, but that Chief Operating Officer Tim Cook will run day-to-day operations, as he did in the previous cases. Apple stock slumped from its high near $350 to below $330 by the end of the week, despite a blowout earnings report on Tuesday evening and sky-high guidance.
Traders kicked off the week on Tuesday on an up note, despite the uncertainty about Jobs, disappointing earnings from Citigroup (C), and lackluster housing and manufacturing reports. The Dow advanced 0.43%, and cracked the 11,800 level.
But the good times ended Wednesday. A day after Citigroup's downbeat report, Goldman Sachs (GS) disclosed declining profit figures. Moreover, American Express (AXP) issued poorly received guidance and said it would cut 550 jobs. The financial sector led the market lower, with the Dow shedding 0.11% but maintaining its hold above the 11,800 level.
Jobless claims retreated back toward the 400,000 level on Thursday, reversing the previous week's unexpected spike. Existing homes sales jumped 12.3% in December, a rare ray of sunshine in the troubled real estate sector. Morgan Stanley (MS) bucked the week's downbeat trend in the financial sector and bested the estimates for both earnings and revenue. But F5 Networks' (FFIV) weak guidance cast a shadow on some techs, and traders couldn't shake their fears that China would tighten up monetary policy in the wake of surprisingly high inflation figures there. The Dow slipped a tiny 0.02%.
GE powered the Dow to a fast start Friday, after it reported a 51% jump in fourth-quarter profit. Traders were also encouraged by Google's better-than-expected report, which was issued after the close Thursday. Google also supplied some boardroom drama by announcing that co-founder Larry Page will take over as CEO in April. The current CEO, Eric Schmidt, brought on in 2001 to provide "adult supervision," will become executive chairman. However, Bank of America Corp. (BAC) joined the banking sector's walk of shame last week with a bad miss on fourth-quarter earnings. The Dow rode its GE-powered jet to a gain of 0.41%. The Dow also managed a weekly win of 0.7%, but both the SPX and the COMP lost ground last week, dropping 0.8% and 2.4% respectively.
What the Trading Desk Is Expecting: RUT Retreat Disappointing
By Todd Salamone, Senior Vice President of Research
"From our analysis of option activity on major exchange-traded funds, it appears to be hedge fund managers moving from an underweight position in U.S. equities. As we have said on previous occasions, the market's best days during the past couple of years have occurred when hedge funds are in accumulation mode... the Russell 2000 Index's (RUT – 807.32) move above the 800-century mark is a plus for the bulls. The next big hurdle for the RUT would be the 850 area, site of its all-time high. Support is currently at 780, which acted as resistance in the second half of December and in turn acted as support in this month's first week of trading... The Standard & Poor's 500 Index( SPX 1,293.24) has moved soundly above 1,250, and the round 1,300 level on the SPX lingers just above, with 1,333 – double the March 2009 low – sitting 2.5% above this century mark. Support for the SPX is in the 1,260-1,280 zone."
--Monday Morning Outlook, Jan. 15, 2011
Thanks to disappointing earnings reactions in the financial sector and a bleak outlook from cloud-computing name F5 Networks (FFIV), major indexes declined last week, with the RUT taking the brunt of the punishment. The small-cap index dropped back below the important 800-century mark and below support at 780 -- a disappointing technical development. The SPX retreated from resistance in the 1,300 area, but closed the week above support at 1,280, rallying from a low of 1,270 on Thursday morning. Support still lies in the 1,260-1,280 zone, with resistance at 1,300.
Turning back to the RUT, on the heels of the weekly close below 780, the next major support area that we see is in the 740 zone, site of the April and November 2010 highs, and the index's advancing 80-day moving average, which acted as an important resistance level in June and July 2010. Resistance is in the 800 area.
The good news for the bulls is that the ratio of buy-to-open put volume relative to buy-to-open call volume on the major exchange-traded funds continues to increase, a sign that hedge fund managers are moving into U.S. equities (see chart immediately below). We prefer to see that this ratio advance amid positive price action, which we didn't experience last week, so it will be important that the SPX trade above support and the RUT quickly retake 780, or this indicator will carry less meaning.
We move into the heart of earnings season during the next couple of weeks, and individual company reports will likely influence the day-to-day price action during this period. Ahead of the official start of this earnings season, Barron's mentioned that "investors are hoping for the best." Since Alcoa's (AA) earnings on Jan.10, the SPX has advanced 13.6 points, or 1.1%.
In October 2010, Barron's suggested that "traders are bracing for the worst." Two weeks after AA's report in October, the SPX was higher by 2.3%. The implication is that earnings expectations were lower in October 2010 relative to now, creating more room for positive surprises in October. This is something to keep in mind as companies of interest to you get set to report in the days and weeks ahead.
Finally, the risk factors that we have outlined during the past couple of weeks are still very much in play, which suggests hedging via married puts, or using calls as a stock-replacement strategy, are still sound strategies. Risks include:
1. January has not been seasonally strong during the past 10 years, with the month marking various corrections and/or beginning of corrections.
2. The CBOE Market Volatility Index (VIX) is trading at a significant premium to SPX historical volatility, and this premium has rolled over from its highs. Such high premiums amid a rollover have preceded setbacks (see chart below).
3. Equity option players hit an extreme in call buying relative to put buying last week.
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Indicator of the Week: S&P 500 Streaks of Note
By Rocky White, Senior Quantitative Analyst
Foreword: The S&P 500's strength since September cannot be denied. It's up over 20% since then. Naturally, we're seeing all kind of statistics that drive home the S&P 500's strength. For example, I read an article pointing out the S&P 500 Index (SPX) had not closed below its 10-day moving average in over 30 trading days. When you read a statistic like that, it can be offered in a couple of different contexts, depending on the bias of the author. If the author is bullish, then it is used to prove what a strong market we've been in. If the author is bearish, then it's implied that the market is overbought and a pullback is imminent. This week I'm going to look at a few statistics that I've seen. Instead of giving my bias, I'll simply show what happened at previous times that we've been in a similar circumstance.
Above the 10-Day MA: As I pointed out above, one streak was the SPX spending 30 straight days above its 10-day moving average (MA). That streak, which ended Thursday, was quite noteworthy. That was only the fourth time we've seen such a streak since 1980. Below is a table showing other times that it happened. It happened in June of 1997, and the market shot even higher over the next couple of months. When it happened in April of last year, it marked the beginning of a significant market pullback.
With mixed results and very few signals, I would say the indicator is inconclusive.
SPX consecutive days above its 10-day moving average since 1980
Above the 50-Day MA: Another streak I saw mentioned was that the SPX has been above the 50-day MA for four straight months. That article claimed it was the first time since 2003, which is wrong. It actually happened last in 2006. The market crossed above the 50-day in July 2006 and stayed above it until February 2007. It's still a notable streak and below is a table showing how the market did going forward.
This analysis I did a little differently. Since this streak is still going and may not break any time soon, I looked at how the market has fared after exactly four months of being above the 50-day MA (rather than after the streak breaks). I also show how many trading days the streak eventually lasted. Notice that the end of December marked the four-month mark in the current streak.
The results below are very impressive. In the eight previous four-month streaks, two months later (which would put us at the beginning of March) the market was higher every time, averaging a return of 3.86%. In the past, four months above the 50-day MA seemed to have confirmed a strong market, signaling more gains in the near future.
SPX returns following a four month streak above its 50-day moving average since 1980
Consecutive Positive Weeks: Another impressive statistic I read last week was that the SPX was up seven weeks in a row. That streak ended on Friday, with the SPX down slightly last week. Below is a table showing how the SPX has performed once a streak of at least seven straight up weeks ends. Nothing real eye-opening jumps out at me. The last time it happened was in 2007, which saw the market move higher in the next couple of months. Looking at all the results, the two-month returns are less than impressive, averaging a negative return, and positive just four of seven times.
SPX returns following a seven or more consecutive positive weeks since 1980
This Week's Key Events: Dow Heavyweights Take Stage
Schaeffer's Editorial Staff
More heavy hitters -- including about a third of the members of the Dow Jones Industrial Average -- will take their turns in the earnings spotlight this week. Here is a brief list of some of the key events. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
Monday
* There are no major economic reports scheduled for Monday. Halliburton Company (HAL), McDonald's Corp. (MCD), PetMed Express Inc. (PETS), Albemarle Corp. (ALB), American Express Co. (AXP), CSX Corp. (CSX), Packaging Corp. of America (PKG), SL Green Realty Corp. (SLG), STMicroelectronics N.V. (STM), Texas Instruments Inc. (TXN), VMware Inc. (VMW), and Zions Bancorporation (ZION) will report earnings.
Tuesday
* The pace picks up Tuesday with the Case-Shiller 20-city home price index for November and the Conference Board's Consumer Confidence Index for January. Scheduled to report earnings are 3M Company (MMM), AK Steel Holding Corp. (AKS), Alaska Air Group Inc. (ALK), Ashland Inc. (ASH ), BlackRock Inc. (BLK), Brinker International Inc. (EAT), Coach Inc. (COH), Corning Incorporated (GLW), EMC Corporation (EMC), Harley-Davidson Inc. (HOG), Johnson & Johnson (JNJ), KeyCorp (KEY), Kimberly-Clark Corp. (KMB), Quest Diagnostics Inc. (DGX), Regions Financial Corp. (RF), Sherwin Williams Co. (SHW), Tellabs Inc. (TLAB), The Travelers Companies Inc. (TRV), United States Steel Corp. (X), Altera Corporation (ALTR), Gilead Sciences Inc. (GILD), Juniper Networks Inc. (JNPR), RF Micro Devices Inc. (RFMD) and Yahoo! Inc. (YHOO).
Wednesday
* The Commerce Department will report on December new home sales in the morning, but the big news will come in the afternoon when the Federal Open Market Committee (FOMC) discloses the results of its two-day meeting. No one expects the Fed to raise interest rates, but market watchers will pay close attention to the Fed's language about the health of the economy and the need to keep interest rates low for an "extended period." The FOMC's membership changes every January. Will new members result in changes to the policy statement? We'll also get the usual weekly report on crude inventories. Abbott Laboratories (ABT), The Boeing Company (BA), ConocoPhillips (COP), Cooper Industries plc (CBE), Eastman Kodak Company (EK), Exelon Corp. (EXC), Rockwell Automation (ROK), Xerox Corporation (XRX), United Technologies Corp. (UTX), US Airways Group Inc. (LCC), Valero Energy Corp. (VLO), WellPoint Inc. (WLP), Xerox Corporation (XRX), E*Trade Financial Corp. (ETFC), Murphy Oil Corp. (MUR), Netflix Inc. (NFLX), Owens-Illinois Inc. (OI), Qualcomm Inc. (QCOM), The Ryland Group Inc. (RYL), and Starbucks Corporation (SBUX), plan to report earnings.
Thursday
* The Labor Department will give us its weekly look at jobless claims, and the Commerce Department will report on durable goods orders in December. Altria Group Inc. (MO), AT&T Inc. (T), Bristol Myers Squib Co. ( BMY), Caterpillar Inc. (CAT), Celgene Corporation (CELG), Cirrus Logic Inc. (CRUS), Colgate-Palmolive Company (CL), Danaher Corporation (DHR), D.R. Horton Inc. (DHI), Eli Lilly & Co. (LLY), Jet Blue Airways Corporation (JBLU), L-3 Communications Holdings Inc. (LLL), Lockheed Martin Corp. (LMT), Mead Johnson Nutrition Company (MJN), Novartis AG (NVS), Nucor Corp. (NUE), Potash Corp./Saskatchewan (POT), The Procter & Gamble Co. (PG), Raytheon Company (RTN), Time Warner Cable Inc. (TWC), The Timken Company (TKR), Tyco International Ltd. (TYCO), Under Armour Inc. (UA) , Amazon.com Inc. (AMZN), The Chubb Corporation (CB), Microsoft Corp. (MSFT), Monster Worldwide Inc. (MWW), SanDisk Corporation (SNDK) and Verisign Inc. (VRSN) will report earnings.
Friday
* provide us with its first look at gross domestic product (GDP) growth in the fourth quarter, the National Association of Realtors will publish its pending homes sales index for November, and the University of Michigan will supply its final look at January consumer sentiment. American Electric Power Co. Inc. (AEP), Chevron Corp. (CVX), Honeywell International Inc. (HON), and Oshkosh Corp. (OSK) will report earnings. |
