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Sunday, May 23, 2010 2:35:26 PM
Monday Morning Outlook: Have We Seen This Movie Before? DJIA Trying to Protect 10,000
Expiration week pressures may have contributed to Thursday's plunge
by Todd Salamone 5/22/2010 12:40 PM
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=100039
The Dow Jones Industrial Average gave up a whopping 4% last week, and dipped below the psychologically important 10,000 level on an intraday basis on Friday. The Dow is now about 9% below its 2010 high, set in late April. Unsurprisingly, the CBOE Market Volatility Index is at an elevated 40, although it's down from Friday morning's freshly tapped annual high. Looking ahead, Todd Salamone, Senior Vice President of Research, is obviously concerned about a deteriorating technical picture, but warns against a knee-jerk panic reaction. Todd thinks that expiration-week pressures may have played as much of a role in Thursday's action as concerns about Europe. Next, Senior Quantitative Analyst Rocky White takes a look at how different market sectors performed during and following the market pullbacks of June-July 2009 and January-February 2010. Rocky compares that performance to the current correction. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: From 'Flash Crash' to Slow Motion Crash
By Joseph Hargett, Senior Equities Analyst
First, there was the "flash crash" of May 6. That may have just been a harbinger of the slow motion crash to come. From Tuesday through Thursday of last week, the Dow Jones Industrial Average (DJIA) plunged more than 550 points, to 10,068, marking a more than 10% decline from the late April highs just north of 11,200. Wall Street was clearly worried that the European debt crisis would spread and threaten the economic recovery in the U.S.
It's hard to remember now after that hair-raising midweek dive, but even though the DJIA spent most of Monday deeply in the red, it actually ended up in positive territory, although by a scant 0.05%. The Dow required a big-time eleventh-hour rebound to overcome an intraday 180-point deficit.
Despite Monday's comeback, Wall Street just couldn't shake the specter of European financial woes. The currency markets helped bring the issue back to the forefront on Tuesday, as the euro tagged a four-year low versus the U.S. dollar, prompting speculation that the 16-nation European currency was on its way out the door. Meanwhile, Germany contributed to the backlash by banning "naked" short selling, which many analysts opined would limit banks' ability to hedge market exposure. Investors in the U.S. expressed their displeasure by sending the Dow more than 1% lower on the day.
Anxiety about the declining euro spilled over into Wednesday's trading, as analysts fretted that the declining European currency may impact U.S. corporations' overseas profits. And if Wall Street wasn't getting enough flack from overseas, economic data on the home front came in weaker than expected, with the Mortgage Bankers Association noting that the number of homes in foreclosure climbed to 4.63% during the first quarter. Still, an upwardly revised outlook on the U.S. economy by the Federal Reserve provided a late-session lift, guiding the DJIA to a milder loss of 0.63% on the day.
Then came Thursday -- what is it about Thursdays? Fears continued to spread that countries like Greece, Spain and Portugal would be unable to pay their debts, despite the massive bailout package put in place by the European Union, and perhaps bring on a repeat of the 2008 financial crisis. Economic reports dampened the already bad mood. Weekly jobless claims came in worse than expected, while the Conference Board reported an unexpected monthly drop in April's leading economic indicators. Stocks were hammered from the outset. When the smoke lifted, all the major indexes had plunged more than 3.6%, with the Dow recording a daily loss of 376 points. The CBOE Market Volatility Index (VIX) spiked 29.6% to 45.79.
The U.S. Senate approved financial reform legislation Thursday, and despite the many complaints on Wall Street about the particulars of the bill, the small note of certainty appeared to encourage traders on Friday. Still, trading crossed the breakeven line several times during the course of the session, sending the VIX up to a new annual peak of 48.20 in early trading. It was only a last-minute push that allowed the Dow to score a 1.25% gain for the day, but that was obviously not enough to mitigate the dismal week. On a weekly basis, the Dow shed 4%, the S&P 500 Index gave up 4.2%, while the Nasdaq Composite tumbled more than 5%.
What the Trader Is Expecting in the Coming Week: Bulls Should Not Panic
By Todd Salamone, Senior Vice President of Research
"... levels of importance on the SPX include the round 1,100 level, which is not only the SPX's 200-day moving average, but also represents about a 10% correction from the recent highs... If in fact officials do something over the weekend to prop up the euro, we could see a huge equity rally on Monday. In the absence of such a plan, there could be follow-through selling... Another potential catalyst this week is the expiration of May options. There is massive out-of-the-money put open interest on various indexes and exchange-traded funds that is getting set to expire... ensure your long positions are hedged, and engage in strategies that reduce risk and give you profit opportunity on unexpected events. This may take on even more importance now, with the technical backdrop questionable and volatility on the rise – the CBOE Market Volatility Index (VIX – 31.24) has experienced nine consecutive closes above its 200-day moving average."
--Monday Morning Outlook, May 15, 2010
Last week brought about further deterioration in the technical backdrop of the market. The knee-jerk reaction might be, "Since the 1,100 level has been breached, should I sell everything?" Before doing so, it might be helpful to consider what may have inspired Thursday's disastrous price action, which violently pushed the S&P 500 Index (SPX) below its 200-day moving average. Was it really worries about Europe that generated this selling activity? Perhaps, but one might cry "nonsense!" since the decline occurred within the context of a euro rally.
Another explanation could be directed toward options expiration. After the broad indexes fell below strikes with heavy put open interest, put sellers at these strikes may have been actively shorting futures to hedge their positions, a concept known as delta hedging. Without getting into the complex details of delta hedging, be assured that this activity can create a snowball effect, much like we saw in Thursday's trading. In fact, it might be more than just coincidence that the intraday lows on Friday were similar to the "flash crash" lows of May 6. As long-time readers of Monday Morning Outlook know, while expiration week tends to be bullish, when we do have a decline, it is typically quite painful.
In another interesting development in Friday's trading, the VIX finally hit a level that matched its highs during the 1997 "Asian Contagion" and the 1998 "Russian Ruble Crisis." In addition, Friday's peak matched the two VIX crests during the first bear market of the new millennium. If the "European Contagion" does not have the negative systemic risk brought on by the Lehman Brothers bankruptcy and our own credit crisis in late 2008 and early 2009, the bulls may find the VIX high on Friday as an extremely encouraging development.
Moreover, on Friday, the VIX's peak was above the high of the previous day, and both its intraday low and weekly close were below Thursday's low. To market technicians, this chart formation is known as a bearish "outside" day, which usually signals lower prices ahead. Or, in this instance, it could signal lower volatility in the days ahead, which would likely coincide with a rally in stocks.
We observed previous instances when the VIX experienced a bearish "outside" day with a huge range, defined by the high being at least 20% above the VIX close. As defined by these parameters, a signal of this sort has occurred eight times since 1995. Per the table below, days one through 10 following these signals have had historical bullish implications. The returns 21 days following the signals have also had bullish implications, but note that the percent positive is less than the at-any-time returns since 1995.
Above being said, proceed with some caution, as the SPX did close below the key 1,100 level. Another concern is that the most recent American Association of Individual Investors' survey, released on Thursday, showed increasing optimism among those surveyed. This is somewhat disturbing, since those polled have proven to be an outstanding contrarian indicator during the past several months. Throw in the fact that this increasing optimism is within the context of a pullback and it becomes even more disturbing.
Potential support for the SPX is Friday's low around 1,055. If this level breaks, another important level would be 1,045, site of the lows in February. Resistance is in the 1,100-1,120 area. You already know the importance of 1,100, as described above. The 1,115 level, which marked the SPX's level at the end of 2009, could also be significant. Finally, 1,120 is yet another potential resistance area, as it's the site of the 160-day moving average and chart resistance in November and December 2009.
Continue to hedge your long positions during this volatile market environment. If you owned May put options as a hedging strategy, remember to buy more protection to replace the expired options.
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: Market Corrections and Sectors
By Rocky White, Senior Quantitative Analyst
Foreword: The S&P 500 Index (SPX) closed at 1,072 last Thursday, translating to a drop of 12% from its closing high on April 23. Many commentators are making a big deal of this, because this is the market's first 10% correction since the March 2009 bottom. That's true, but 10% is an arbitrary figure; we have had significant corrections in the last year that were less than that. Below is a chart of the SPX since March 2009. I circled the significant corrections that I'm talking about. In June-July 2009 the market fell more than 7% on a closing basis, and then in January-February 2010 the market had a correction of 8%. Finally, I circled the current correction.
This week I'm taking a look back at those corrections on a sector basis. I examine what sectors were hit the hardest and what that meant going forward. We'll see if this recent correction resembles those prior cases. It may give us insight on where we can go from here and how to profit from it.
Daily chart of the SPX since March 2009 with highlighted periods of correction
Returns by Sector: I track the returns of the various sectors by using a list of 31 different exchange-traded funds (ETFs). Below is a table that shows returns for many of those ETFs. The top of the table shows the 10 worst-performing ETFs. Then I show the SPY, representing the S&P 500. Finally, the 10 sectors below the SPY are top-performing sectors during the current correction. The last two columns in the table show where the sector ranked during the prior market pullbacks. The best-performing ETF during the corresponding correction has a rank of 1. The worst-performing ETF has a rank of 31.
What I gather from the table is that the three market corrections are quite similar. Commodities/metals get hit especially hard during the pullbacks. Bonds and the dollar do relatively well. Gold outperformed the SPX in the prior two corrections, but this time it is doing especially well, as it is the third best-performing sector among the 31 ETFs that I track. The next two best-performing ETFs after gold are gold miners and silver. Those sectors are currently negative, but they have held up better than the SPX. That's different from the prior two corrections, in which they underperformed the SPX.
Following the Correction: Hopefully I'm not jinxing anything, but let's assume Thursday's close marked the bottom for a while and we get a decent bounce over the next few weeks. Below are a couple of tables which show the best and worst five sectors of the prior corrections, and how they performed over the next two weeks and one month after the market hit its low.
What you will notice, and something we've observed time and time again, is that the sectors that get hit the hardest during a correction generally bounce back the most. Looking at the table showing the June 2009 correction, we see all five of the sectors that performed the worst during the correction outperformed the S&P 500 over the next two weeks and one month. Also note that four of the five best-performing sectors underperformed the S&P 500 in the following month. A similar pattern is shown in the table with data from the January 2010 correction.
Implications: The hard part going forward is predicting whether the market is going to bounce back in the next few weeks or remain weak and keep falling. Unfortunately, the analysis above doesn't help with that. But it does tell us that if you think Thursday was the low and you see us bouncing back, then commodities is the way to go. If we continue to fall then avoid those and get some exposure to bonds, the dollar and/or maybe even gold.
This Week's Key Events: Home Sales, GDP and Consumer Sentiment
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 for official reporting dates.
Monday
*
Monday offers up April's existing home sales, while Campbell Soup Company (CPB), Yingli Green Energy Hold. Co. Ltd. (YGE), and Phillips-Van Heusen Corp. (PVH) are on tap to present their quarterly earnings figures.
Tuesday
*
May's consumer confidence figures will arrive on Tuesday. On the earnings front, AutoZone Inc. (AZO), Cracker Barrel Old Country Store Inc. (CBRL), Medtronic Inc. (MDT), Trina Solar Limited (TSL), and TiVo Inc. (TIVO) are scheduled to release their quarterly reports.
Wednesday
*
Wednesday brings the weekly report on U.S. petroleum supplies, as well as April's durable goods and April's new home sales. Taking their turn in the earnings confessional are American Eagle Outfitters (AEO), Diana Shipping Inc. (DSX), Solarfun Power Holdings Co. Ltd. (SOLF), Toll Brothers Inc. (TOL), Hoku Corp. (HOKU), Jo-Ann Stores Inc. (JAS), NetApp Inc. (NTAP), and Take-Two Interactive Software Inc. (TTWO).
Thursday
*
Weekly initial jobless claims hit the Street on Thursday, followed by a second look at first-quarter gross domestic product (GDP). Big Lots Inc. (BIG), Costco Wholesale Corp. (COST), H.J. Heinz Company (HNZ), Tiffany & Co. (TIF), Guess?, Inc. (GES), J. Crew Group Inc. (JCG), Novell Inc. (NOVL), and OmniVision Technologies Inc. (OVTI) are scheduled to report earnings.
Friday
*
Friday closes the week with April's personal income and spending reports, the PCE core index for April, the Chicago Business Barometer for May, and the University of Michigan's consumer sentiment index for May. There are currently no earnings reports scheduled for release on Friday.
And now a few sectors of note...
Dissecting The Sectors
Sector
Real Estate
Bullish
Outlook: It was another rough week on Wall Street, but the iShares Dow Jones U.S. Real Estate Index Fund (IYR) held up admirably well. In fact, IYR closed above its 20-week moving average and the 47.50 level. This area also marks a half-high of the fund's February 2007 peak near $95 per share. Furthermore, the 47.50 level provided stiff overhead resistance in December 2009, and should provide a springboard of support for IYR. On the sentiment front, IYR's International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) 50-day buy (to open) put/call volume ratio continues to turn higher from low levels. This may be indicative of hedged money accumulating stocks in this group. Elsewhere, bearish sentiment continues to pile up on the commercial real estate sector. Recently, in a story titled "Lenders Open to Real-Estate Pain," The Wall Street Journal offered up the following gem in reference to commercial real estate: "A slow motion train wreck is still a train wreck." There is also plenty of negativity outside of the financial media. Specifically, fewer than 35% of the 1,055 analysts covering the sector have doled out "buys." Any upgrades could provide lift for the sector.
Sector
Financials
Neutral
Outlook: The Financial Select Sector SPDR (XLF) struggled alongside the broader market last week, and failed to hold support at its 200-day moving average. This trendline contained the trust's February 2010 lows, and could create a bit of turmoil for the fund. However, the shares held above intermediate-term support in the 14 region. Meanwhile, there is room for sentiment to improve toward the group. Specifically, roughly half of the 513 analysts following financial-sector stocks rate them a "hold" or worse. Any upgrades from this bunch could provide an additional tailwind. However, the XLF's International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) 50-day buy-to-open put/call ratio recently peaked, suggesting that hedged buyers are no longer in accumulation mode. We view this as an even greater concern at the moment with the XLF trading below its 200-day moving average.
Sector
Consumer Discretionary
Bullish
Outlook: Economic data has been strong for retailers lately, as retail sales rose for the seventh straight month in April, climbing by a better-than-expected 0.4%. Adding to the upside surprise, sales in February and March were each revised higher by two-tenths of a percentage point. Technically speaking, the S&P Retail SPDR (XRT) rebounded from support at its 120-day moving average last week. With many retailers releasing their quarterly reports, we recommend shifting your focus to under-loved names that are reacting favorably to earnings. For example, Whole Foods Market Inc. (WFMI) looks promising after rallying more than 40% on a year-to-date basis and issuing a strong quarterly report. The stock also sports only four "buys" out of 18 total rankings. By comparison, Kohl's Corp. (KSS) fell 5.8% in the wake of its earnings report, despite attracting 18 "buys" out of 22 ratings. Given this data, we would favor WFMI over KSS, as WFMI has more upgrade potential and stronger tailwinds related to the positive earnings surprise. Speaking of ratings, only about 50% of the analyst ratings on retail stocks are "buys," leaving plenty of room for potential upgrades. As analysts and investors digest the improving economic and technical outlook for the sector, we should see added buying pressure push these stocks steadily higher.
Expiration week pressures may have contributed to Thursday's plunge
by Todd Salamone 5/22/2010 12:40 PM
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=100039
The Dow Jones Industrial Average gave up a whopping 4% last week, and dipped below the psychologically important 10,000 level on an intraday basis on Friday. The Dow is now about 9% below its 2010 high, set in late April. Unsurprisingly, the CBOE Market Volatility Index is at an elevated 40, although it's down from Friday morning's freshly tapped annual high. Looking ahead, Todd Salamone, Senior Vice President of Research, is obviously concerned about a deteriorating technical picture, but warns against a knee-jerk panic reaction. Todd thinks that expiration-week pressures may have played as much of a role in Thursday's action as concerns about Europe. Next, Senior Quantitative Analyst Rocky White takes a look at how different market sectors performed during and following the market pullbacks of June-July 2009 and January-February 2010. Rocky compares that performance to the current correction. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: From 'Flash Crash' to Slow Motion Crash
By Joseph Hargett, Senior Equities Analyst
First, there was the "flash crash" of May 6. That may have just been a harbinger of the slow motion crash to come. From Tuesday through Thursday of last week, the Dow Jones Industrial Average (DJIA) plunged more than 550 points, to 10,068, marking a more than 10% decline from the late April highs just north of 11,200. Wall Street was clearly worried that the European debt crisis would spread and threaten the economic recovery in the U.S.
It's hard to remember now after that hair-raising midweek dive, but even though the DJIA spent most of Monday deeply in the red, it actually ended up in positive territory, although by a scant 0.05%. The Dow required a big-time eleventh-hour rebound to overcome an intraday 180-point deficit.
Despite Monday's comeback, Wall Street just couldn't shake the specter of European financial woes. The currency markets helped bring the issue back to the forefront on Tuesday, as the euro tagged a four-year low versus the U.S. dollar, prompting speculation that the 16-nation European currency was on its way out the door. Meanwhile, Germany contributed to the backlash by banning "naked" short selling, which many analysts opined would limit banks' ability to hedge market exposure. Investors in the U.S. expressed their displeasure by sending the Dow more than 1% lower on the day.
Anxiety about the declining euro spilled over into Wednesday's trading, as analysts fretted that the declining European currency may impact U.S. corporations' overseas profits. And if Wall Street wasn't getting enough flack from overseas, economic data on the home front came in weaker than expected, with the Mortgage Bankers Association noting that the number of homes in foreclosure climbed to 4.63% during the first quarter. Still, an upwardly revised outlook on the U.S. economy by the Federal Reserve provided a late-session lift, guiding the DJIA to a milder loss of 0.63% on the day.
Then came Thursday -- what is it about Thursdays? Fears continued to spread that countries like Greece, Spain and Portugal would be unable to pay their debts, despite the massive bailout package put in place by the European Union, and perhaps bring on a repeat of the 2008 financial crisis. Economic reports dampened the already bad mood. Weekly jobless claims came in worse than expected, while the Conference Board reported an unexpected monthly drop in April's leading economic indicators. Stocks were hammered from the outset. When the smoke lifted, all the major indexes had plunged more than 3.6%, with the Dow recording a daily loss of 376 points. The CBOE Market Volatility Index (VIX) spiked 29.6% to 45.79.
The U.S. Senate approved financial reform legislation Thursday, and despite the many complaints on Wall Street about the particulars of the bill, the small note of certainty appeared to encourage traders on Friday. Still, trading crossed the breakeven line several times during the course of the session, sending the VIX up to a new annual peak of 48.20 in early trading. It was only a last-minute push that allowed the Dow to score a 1.25% gain for the day, but that was obviously not enough to mitigate the dismal week. On a weekly basis, the Dow shed 4%, the S&P 500 Index gave up 4.2%, while the Nasdaq Composite tumbled more than 5%.
What the Trader Is Expecting in the Coming Week: Bulls Should Not Panic
By Todd Salamone, Senior Vice President of Research
"... levels of importance on the SPX include the round 1,100 level, which is not only the SPX's 200-day moving average, but also represents about a 10% correction from the recent highs... If in fact officials do something over the weekend to prop up the euro, we could see a huge equity rally on Monday. In the absence of such a plan, there could be follow-through selling... Another potential catalyst this week is the expiration of May options. There is massive out-of-the-money put open interest on various indexes and exchange-traded funds that is getting set to expire... ensure your long positions are hedged, and engage in strategies that reduce risk and give you profit opportunity on unexpected events. This may take on even more importance now, with the technical backdrop questionable and volatility on the rise – the CBOE Market Volatility Index (VIX – 31.24) has experienced nine consecutive closes above its 200-day moving average."
--Monday Morning Outlook, May 15, 2010
Last week brought about further deterioration in the technical backdrop of the market. The knee-jerk reaction might be, "Since the 1,100 level has been breached, should I sell everything?" Before doing so, it might be helpful to consider what may have inspired Thursday's disastrous price action, which violently pushed the S&P 500 Index (SPX) below its 200-day moving average. Was it really worries about Europe that generated this selling activity? Perhaps, but one might cry "nonsense!" since the decline occurred within the context of a euro rally.
Another explanation could be directed toward options expiration. After the broad indexes fell below strikes with heavy put open interest, put sellers at these strikes may have been actively shorting futures to hedge their positions, a concept known as delta hedging. Without getting into the complex details of delta hedging, be assured that this activity can create a snowball effect, much like we saw in Thursday's trading. In fact, it might be more than just coincidence that the intraday lows on Friday were similar to the "flash crash" lows of May 6. As long-time readers of Monday Morning Outlook know, while expiration week tends to be bullish, when we do have a decline, it is typically quite painful.
In another interesting development in Friday's trading, the VIX finally hit a level that matched its highs during the 1997 "Asian Contagion" and the 1998 "Russian Ruble Crisis." In addition, Friday's peak matched the two VIX crests during the first bear market of the new millennium. If the "European Contagion" does not have the negative systemic risk brought on by the Lehman Brothers bankruptcy and our own credit crisis in late 2008 and early 2009, the bulls may find the VIX high on Friday as an extremely encouraging development.
Moreover, on Friday, the VIX's peak was above the high of the previous day, and both its intraday low and weekly close were below Thursday's low. To market technicians, this chart formation is known as a bearish "outside" day, which usually signals lower prices ahead. Or, in this instance, it could signal lower volatility in the days ahead, which would likely coincide with a rally in stocks.
We observed previous instances when the VIX experienced a bearish "outside" day with a huge range, defined by the high being at least 20% above the VIX close. As defined by these parameters, a signal of this sort has occurred eight times since 1995. Per the table below, days one through 10 following these signals have had historical bullish implications. The returns 21 days following the signals have also had bullish implications, but note that the percent positive is less than the at-any-time returns since 1995.
Above being said, proceed with some caution, as the SPX did close below the key 1,100 level. Another concern is that the most recent American Association of Individual Investors' survey, released on Thursday, showed increasing optimism among those surveyed. This is somewhat disturbing, since those polled have proven to be an outstanding contrarian indicator during the past several months. Throw in the fact that this increasing optimism is within the context of a pullback and it becomes even more disturbing.
Potential support for the SPX is Friday's low around 1,055. If this level breaks, another important level would be 1,045, site of the lows in February. Resistance is in the 1,100-1,120 area. You already know the importance of 1,100, as described above. The 1,115 level, which marked the SPX's level at the end of 2009, could also be significant. Finally, 1,120 is yet another potential resistance area, as it's the site of the 160-day moving average and chart resistance in November and December 2009.
Continue to hedge your long positions during this volatile market environment. If you owned May put options as a hedging strategy, remember to buy more protection to replace the expired options.
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: Market Corrections and Sectors
By Rocky White, Senior Quantitative Analyst
Foreword: The S&P 500 Index (SPX) closed at 1,072 last Thursday, translating to a drop of 12% from its closing high on April 23. Many commentators are making a big deal of this, because this is the market's first 10% correction since the March 2009 bottom. That's true, but 10% is an arbitrary figure; we have had significant corrections in the last year that were less than that. Below is a chart of the SPX since March 2009. I circled the significant corrections that I'm talking about. In June-July 2009 the market fell more than 7% on a closing basis, and then in January-February 2010 the market had a correction of 8%. Finally, I circled the current correction.
This week I'm taking a look back at those corrections on a sector basis. I examine what sectors were hit the hardest and what that meant going forward. We'll see if this recent correction resembles those prior cases. It may give us insight on where we can go from here and how to profit from it.
Daily chart of the SPX since March 2009 with highlighted periods of correction
Returns by Sector: I track the returns of the various sectors by using a list of 31 different exchange-traded funds (ETFs). Below is a table that shows returns for many of those ETFs. The top of the table shows the 10 worst-performing ETFs. Then I show the SPY, representing the S&P 500. Finally, the 10 sectors below the SPY are top-performing sectors during the current correction. The last two columns in the table show where the sector ranked during the prior market pullbacks. The best-performing ETF during the corresponding correction has a rank of 1. The worst-performing ETF has a rank of 31.
What I gather from the table is that the three market corrections are quite similar. Commodities/metals get hit especially hard during the pullbacks. Bonds and the dollar do relatively well. Gold outperformed the SPX in the prior two corrections, but this time it is doing especially well, as it is the third best-performing sector among the 31 ETFs that I track. The next two best-performing ETFs after gold are gold miners and silver. Those sectors are currently negative, but they have held up better than the SPX. That's different from the prior two corrections, in which they underperformed the SPX.
Following the Correction: Hopefully I'm not jinxing anything, but let's assume Thursday's close marked the bottom for a while and we get a decent bounce over the next few weeks. Below are a couple of tables which show the best and worst five sectors of the prior corrections, and how they performed over the next two weeks and one month after the market hit its low.
What you will notice, and something we've observed time and time again, is that the sectors that get hit the hardest during a correction generally bounce back the most. Looking at the table showing the June 2009 correction, we see all five of the sectors that performed the worst during the correction outperformed the S&P 500 over the next two weeks and one month. Also note that four of the five best-performing sectors underperformed the S&P 500 in the following month. A similar pattern is shown in the table with data from the January 2010 correction.
Implications: The hard part going forward is predicting whether the market is going to bounce back in the next few weeks or remain weak and keep falling. Unfortunately, the analysis above doesn't help with that. But it does tell us that if you think Thursday was the low and you see us bouncing back, then commodities is the way to go. If we continue to fall then avoid those and get some exposure to bonds, the dollar and/or maybe even gold.
This Week's Key Events: Home Sales, GDP and Consumer Sentiment
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 for official reporting dates.
Monday
*
Monday offers up April's existing home sales, while Campbell Soup Company (CPB), Yingli Green Energy Hold. Co. Ltd. (YGE), and Phillips-Van Heusen Corp. (PVH) are on tap to present their quarterly earnings figures.
Tuesday
*
May's consumer confidence figures will arrive on Tuesday. On the earnings front, AutoZone Inc. (AZO), Cracker Barrel Old Country Store Inc. (CBRL), Medtronic Inc. (MDT), Trina Solar Limited (TSL), and TiVo Inc. (TIVO) are scheduled to release their quarterly reports.
Wednesday
*
Wednesday brings the weekly report on U.S. petroleum supplies, as well as April's durable goods and April's new home sales. Taking their turn in the earnings confessional are American Eagle Outfitters (AEO), Diana Shipping Inc. (DSX), Solarfun Power Holdings Co. Ltd. (SOLF), Toll Brothers Inc. (TOL), Hoku Corp. (HOKU), Jo-Ann Stores Inc. (JAS), NetApp Inc. (NTAP), and Take-Two Interactive Software Inc. (TTWO).
Thursday
*
Weekly initial jobless claims hit the Street on Thursday, followed by a second look at first-quarter gross domestic product (GDP). Big Lots Inc. (BIG), Costco Wholesale Corp. (COST), H.J. Heinz Company (HNZ), Tiffany & Co. (TIF), Guess?, Inc. (GES), J. Crew Group Inc. (JCG), Novell Inc. (NOVL), and OmniVision Technologies Inc. (OVTI) are scheduled to report earnings.
Friday
*
Friday closes the week with April's personal income and spending reports, the PCE core index for April, the Chicago Business Barometer for May, and the University of Michigan's consumer sentiment index for May. There are currently no earnings reports scheduled for release on Friday.
And now a few sectors of note...
Dissecting The Sectors
Sector
Real Estate
Bullish
Outlook: It was another rough week on Wall Street, but the iShares Dow Jones U.S. Real Estate Index Fund (IYR) held up admirably well. In fact, IYR closed above its 20-week moving average and the 47.50 level. This area also marks a half-high of the fund's February 2007 peak near $95 per share. Furthermore, the 47.50 level provided stiff overhead resistance in December 2009, and should provide a springboard of support for IYR. On the sentiment front, IYR's International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) 50-day buy (to open) put/call volume ratio continues to turn higher from low levels. This may be indicative of hedged money accumulating stocks in this group. Elsewhere, bearish sentiment continues to pile up on the commercial real estate sector. Recently, in a story titled "Lenders Open to Real-Estate Pain," The Wall Street Journal offered up the following gem in reference to commercial real estate: "A slow motion train wreck is still a train wreck." There is also plenty of negativity outside of the financial media. Specifically, fewer than 35% of the 1,055 analysts covering the sector have doled out "buys." Any upgrades could provide lift for the sector.
Sector
Financials
Neutral
Outlook: The Financial Select Sector SPDR (XLF) struggled alongside the broader market last week, and failed to hold support at its 200-day moving average. This trendline contained the trust's February 2010 lows, and could create a bit of turmoil for the fund. However, the shares held above intermediate-term support in the 14 region. Meanwhile, there is room for sentiment to improve toward the group. Specifically, roughly half of the 513 analysts following financial-sector stocks rate them a "hold" or worse. Any upgrades from this bunch could provide an additional tailwind. However, the XLF's International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) 50-day buy-to-open put/call ratio recently peaked, suggesting that hedged buyers are no longer in accumulation mode. We view this as an even greater concern at the moment with the XLF trading below its 200-day moving average.
Sector
Consumer Discretionary
Bullish
Outlook: Economic data has been strong for retailers lately, as retail sales rose for the seventh straight month in April, climbing by a better-than-expected 0.4%. Adding to the upside surprise, sales in February and March were each revised higher by two-tenths of a percentage point. Technically speaking, the S&P Retail SPDR (XRT) rebounded from support at its 120-day moving average last week. With many retailers releasing their quarterly reports, we recommend shifting your focus to under-loved names that are reacting favorably to earnings. For example, Whole Foods Market Inc. (WFMI) looks promising after rallying more than 40% on a year-to-date basis and issuing a strong quarterly report. The stock also sports only four "buys" out of 18 total rankings. By comparison, Kohl's Corp. (KSS) fell 5.8% in the wake of its earnings report, despite attracting 18 "buys" out of 22 ratings. Given this data, we would favor WFMI over KSS, as WFMI has more upgrade potential and stronger tailwinds related to the positive earnings surprise. Speaking of ratings, only about 50% of the analyst ratings on retail stocks are "buys," leaving plenty of room for potential upgrades. As analysts and investors digest the improving economic and technical outlook for the sector, we should see added buying pressure push these stocks steadily higher.
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