Monday Morning Outlook: DJIA Cracks 11,200, And Extends Rally to Eight Weeks
Upward momentum remains intact, despite Goldman, Greece
by Todd Salamone 4/24/2010 12:46 PM
The Dow Jones Industrial Average spent the week knocking on the door of 11,150, and on Friday walked right through. The Dow extended its eight-week long rally by climbing another 1.7%. Looking ahead to next week, Todd Salamone, Senior Vice President of Research, looks at several indicators that all seem to suggest that the market's upward momentum remains intact. Next, Senior Quantitative Analyst Rocky White analyzes the track record of Wall Street analysts over the course of the past year (it's not a pretty picture). Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: A Shiny Apple, and Another Week of Gains
By Joseph Hargett, Senior Equities Analyst
The January earnings season brought with it a broad-market pullback that lasted into February, and there was every reason to expect the bulls might take a breather this time around, too. Goldman Sachs (GS) fallout lingered, recovery from the recession remains a stop-and-start affair, stocks were due for a pullback following a strong rally from the February low, overseas debt issues continued to weigh, the airline sector was hit broadside by the Icelandic volcano ... and yet, the market continued on its merry way this past week.
The Goldman drama, which broke the previous Friday when the Securities and Exchange Commission charged the Wall Street powerhouse with defrauding investors, hung over the weekend like a volcanic ash cloud. But Citigroup (C) reported solid earnings on Monday, and the Conference Board noted that its index of leading economic indicators jumped 1.4% in March. The Dow gained 0.67% to kick off the week.
Goldman was back in the headlines Tuesday -- this time, reporting a 91% surge in first-quarter profits. Harley-Davidson (HOG) and Coach (COH), representing two distinct wings of the consumer discretionary sector, also filed positive reports, and the Dow inched ahead by 0.23%.
Apple Inc. (AAPL) provided a much-needed shot in the arm for the tech-laden Nasdaq Composite (COMP) on Wednesday. The gadget guru reported a 49% leap in revenue due to better-than-expected iPhone sales, and helped push the COMP into the black by 0.17%. Meanwhile, positive reactions to quarterly reports from Boeing (BA) and United Technologies (UTX) may have made the difference for the Dow, which squeaked by with a gain of 0.07%.
Thursday was nearly a Greek tragedy for Wall Street, as fresh concerns about Greece's sovereign debt piled on top of disappointing forecasts from eBay (EBAY) and Qualcomm (QCOM) to spark an early wave of selling pressure. However, an unexpected weekly decline in initial jobless claims and a stronger-than-expected 6.8% jump in existing home sales for March provided enough ballast to keep the Dow above breakeven, with a gain of 0.08%.
The Dow finally shook off the yoke of resistance at the 11,150 level on Friday. This level had capped the blue-chip barometer for seven consecutive sessions, putting up a bigger fight than the media-favorite 11K region. Overseas, Greek officials asked to tap a bailout package cobbled together by the European Union and the International Monetary Fund. Meanwhile, on the domestic front, March new home sales spiked 27%. As a result, the Dow powered above 11,200 on Friday to end the week with a gain of 1.7%. The broader S&P 500 Index (SPX) rose 2.1% for the week, while the COMP added 2%, thanks partly to a 9% gain by tech darling AAPL.
What the Trader Is Expecting in the Coming Week: The Market Bends, But Doesn't Break
By Todd Salamone, Senior Vice President of Research
The market's momentum continues, as slight hiccups are quickly met with sideline money coming in to support stocks. Despite the historical tendencies of market weakness in the first week of a five-week expiration cycle, the S&P 500 Index (SPX) broke above the 1,200 level last week, as investors did not hesitate to move beyond the Securities and Exchange Commission's (SEC) fraud allegations against Goldman Sachs. On Thursday morning, the U.S. market had its back up against the wall once again, as overseas markets sold off in response to renewed credit worries in Greece. The first 30 minutes of trading were met with selling, but from there a recovery ensued, and stocks closed higher on the day. Investors are focusing on earnings, which continue to beat expectations, despite concerns that earnings expectations were too high.
The SPX's lows on Thursday morning coincided with moving average support on a 30-minute chart that we have been following closely since the breakout above the January highs in March. This concept was discussed last week:
"The market's short-term momentum higher has not been broken, as measured by various exponential moving averages that we follow on the 30-minute S&P 500 Index (SPX) chart below. Note that the 160-unit and 195-unit trendlines are still intact, and have held pullbacks in check since the beginning of March. These are moving averages that we will monitor in coming days, as a breach might signal a slowdown in the SPX's upward momentum. Just below these support areas is the SPX's rising 20-day moving average, which is located around 1,180..."
On the 30-minute SPX graph below, note that the market's momentum "bent" last week, but ultimately did not break. During a couple of pullbacks last week, the rising 20-day moving average acted as support, and the quick move back above the key intraday trendlines that we follow confirms that the upward momentum remains intact. In fact, the SPX closed the week above resistance at the previous week's highs.
While this may not be a huge surprise to you, the Goldman Sachs fraud charges seemed to shake retail investors' nerves, as last week's American Association of Individual Investors' poll revealed that the percentage of bullish investors dropped from 48% to 38%, and the bearish percentage jumped from 29% to 34%. From a contrarian perspective, bulls should welcome this shift in sentiment, as these investors have been caught on the wrong side of the market for months. Having been burned twice during the past 10 years, it is evident that retail investors are looking for any and all reasons to avoid jumping into the market, and are now consumed with the thought that we have come "too far, too fast."
For those of you who have been following our analysis, you are aware that we monitor option activity on exchange-traded funds (ETFs) closely. Specifically, we analyze the buy (to open) put/call volume ratios on individual ETFs to gauge how the hedge fund world is positioning itself. For example, when the buy (to open) put/call volume ratio is rising, our theory is these influential market participants are buying puts to hedge long positions that they are accumulating, and the market tends to rally as this accumulation phase occurs. Similarly, when the ratio declines, the market will tend to trade in a range or decline, and this is evidence of accumulation slowing or even distribution taking place among these players.
Currently, the 50-day buy (to open) put/call volume ratio on the iShares Russell 2000 Index (IWM) is at "off the chart" levels relative to the past couple of years. On one hand, this may be worrisome, as abnormally high ratios might be indicative of climactic buying.
But upon closer inspection, the volume making up this ratio is low -- in fact, very low. With hedge fund assets back to levels that preceded the financial crisis, the lack of volume may indicate that there is a lot of sideline cash within this group that is capable of further supporting the market.
In order to illustrate this point, the graph below displays the 50-day cumulative buy (to open) put volume on the iShares Russell 2000 Index (IWM), PowerShares QQQ Trust (QQQQ) and the SPDR S&P 500 ETF Trust (SPY). In each of these cases, put volume is below 2008 peak levels. Moreover, cumulative put volume on the IWM is a whopping 60% off its high. The fact that the IWM's put/call ratio is trending higher (evidence of accumulation), but well off its previous highs (evidence that there is a lot more room for further accumulation), could have bullish implications.
In fact, in analyzing the chart below, the biggest area of opportunity appears to be in the small-cap names, as represented by the IWM. Yet, many Wall Street strategists advise avoiding this group in favor of larger-cap, so-called higher-quality stocks that continue to be underperformers during market advances, and offer no real safety during declines.
IWM, QQQQ, and SPY 50-day buy to open put/call volume ratios
Finally, the percentage spread between SPX historical volatility and the actual CBOE Market Volatility Index (VIX – 16.62) has narrowed considerably during the past three weeks, with little consequence to the market. The VIX was trading 150% above the SPX's 20-day historical volatility earlier in the month, but is now only 73% above the SPX historical volatility reading. The spread has narrowed mainly due to a recent pop in SPX historical volatility, driven mainly by the April expiration day pullback, from the April 6 low of 6.7% to the current 9.6% reading. We said previously that it would take only a small decline in the market to drive historical volatility higher and narrow this spread.
Support for the SPX is in the 1,190-1,195 area. In terms of resistance, many market watchers will be focusing on SPX 1,228, which is a 61.8% Fibonacci retracement of the October 2007 high and March 2009 low. Pullbacks should be continued to be viewed as buying opportunities, with an emphasis on consumer discretionary, real estate, financial and small-cap names.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.
Indicator of the Week: A Scorecard on the Analysts
By Rocky White, Senior Quantitative Analyst
Foreword: At Schaeffer's, we pay close attention to Wall Street analysts' rankings on individual stocks. As contrarians, we view the analysts' position as an important part of the sentiment picture. If analysts are very bullish on an underperforming stock, then we'll tend to be bearish. If analysts are bearish on an outperforming stock, then we consider that bullish. Analysts don't have a track record of strongly outperforming the market. Also, if all analysts are bullish on a stock, then it eliminates the chance of an upgrade; if the only possible action to take is a downgrade, then it often sends a stock tumbling.
Analysts Wrong a Year Ago: I looked at "buy"/"sell" recommendations for individual stocks, and grouped those recommendations by sector to get a feel for which sectors were favored by Wall Street analysts one year ago. The table below shows how those sectors performed and how the analysts were aligned. (Analysts must hate it when people do this.)
The first table shows which sectors were most loved by analysts one year ago. They seemed to really like medicine, with biomeds, drugs, and health care in the top five. They also liked oil and airlines. If you average the 52-week returns of those sectors, you get 51%. Now look at the bottom table, which shows the bottom five sectors in terms of percentage "buy" recommendations. Averaging those 52-week returns gives you 83%. Your returns would have been significantly better had you done the opposite of what the analysts were saying.
Sector returns versus analyst rankings
You might be wondering how analysts are aligned now, so you know what not to do going forward. The tables below show which sectors currently have the highest percentage of "buy" recommendations and which sectors have the lowest.
Current analysts percentage buy ratings by sector
All Sectors: I thought this data was interesting, so I included a table showing the data for all sectors that had an adequate number of tickers. The table is sorted by how analysts are currently aligned (from bullish to bearish). Despite the analysis above showing analysts were wrong a year ago, they seem to be a bit stubborn. You will notice banks and real estate are still the sectors on which analysts are most bearish. The biomeds and airlines remain among analysts' favorite sectors, and both were also in the top five one year ago.
Analyst percent buy ratings sorted by sector
This Week's Key Events: Advance First-Quarter Gross Domestic Product on Tap
By Joseph Hargett, Senior Equities Analyst
Here is a brief list of some of the key events for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website site for official reporting dates.
Monday
* The economic front is devoid of data on Monday. Caterpillar Inc. (CAT), Humana Inc. (HUM), Sohu.com Inc. (SOHU), Boston Scientific Corp. (BSX), and Texas Instruments Inc. (TXN) will release their earnings reports.
Tuesday
* Tuesday offers up the Case/Shiller home price index for February and the April consumer confidence index. On the earnings front, 3M Company (MMM), DuPont (DD), Ford Motor Co. (F), Lexmark International Inc. (LXK), Newmont Mining Corp. (NEM), Office Depot Inc. (ODP), U.S. Steel Corp. (X), UAL Corp. (UAUA), Under Armour Inc. (UA), United Parcel Service Inc. (UPS), Broadcom Corp. (BRCM), Panera Bread Co. (PNRA), and RF Micro Devices Inc. (RFMD) are scheduled to release their quarterly reports.
Wednesday
* On Wednesday, the usual report on weekly U.S. petroleum supplies will be overshadowed by a statement on monetary policy by the Federal Open Market Committee. Taking their turn in the earnings confessional are Barrick Gold Corp. (ABX), Comcast Corp. (CMCSA), Corning Inc. (GLW), Hecla Mining Co. (HL), Royal Caribbean Cruises Ltd. (RCL), The Allstate Corp. (ALL), Baidu Inc. (BIDU), First Solar Inc. (FSLR), Visa Inc. (V), and Xilinx Inc. (XLNX).
Thursday
* Thursday offers up the usual weekly initial jobless claims. Aetna Inc. (AET), Akeena Solar Inc. (AKNS), Colgate-Palmolive Co. (CL), ConocoPhillips (COP), Eastman Kodak Co. (EK), Exxon Mobil Corp. (XOM), Fortune Brands Inc. (FO), Kellogg Co. (K), Motorola Inc. (MOT), OfficeMax Inc. (OMX), Potash Corp. of Saskatchewan (POT), The Procter & Gamble Co. (PG), Chiquita Brands International Inc. (CQB), KLA-Tencor Corp. (KLAC), McAfee Inc. (MFE), and MEMC Electronic Materials Inc. (WFR) are scheduled to report earnings.
Friday
* Friday closes the week with an advance look at first-quarter gross domestic product, the April Chicago business barometer and the April University of Michigan consumer sentiment index. Rounding out the week's earnings reports are Avon Products Inc. (AVP), Chevron Corp. (CVX), China Sunergy Co., Ltd. (CSUN), and Constellation Energy Group Inc. (CEG). |
