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Sunday, November 07, 2010 6:03:20 PM
Monday Morning Outlook: DJIA, SPX, Nasdaq at Two-Year Highs
Traders applaud election results, new Fed stimulus
by Todd Salamone 11/6/2010 10:30 AM
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=103332
"Don't Fight the Fed," read the headline on Page 1 of The Wall Street Journal on Friday. The bulls agreed and the Dow Jones Industrial Average powered ahead 2.9% last week, finishing above 11,400. All three of the major market indexes are at year-to-date highs and at levels not seen since September 2008. Looking ahead, Todd Salamone, Senior Vice President of Research, observes that "for now, bulls are in control," but warns "anything can happen anytime," and advises keeping hedges in place. Next, Senior Quantitative Analyst Rocky White wonders whether money managers try to "catch up" in the last two months of the year by chasing stocks that have done well in the first 10 months. If so, the added buying pressure could provide yet another boost for these outperformers. But Rocky's survey finds a mixed bag of results. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: Fed Lights the Fuse
Schaeffer's Editorial Staff
The elections set the table, and the Fed lit the fuse, to mix a metaphor.
After treading water in the early part of the week while waiting for the Fed and election results, the Dow Jones Industrial Average soared more than 200 points on Thursday, with traders evidently approving both the Fed's restart of the money machine and the prospects of legislative gridlock in Washington, D.C. Thursday's bull rush put the Dow well above the April highs, and also reclaimed territory not explored since the fall of Lehman Brothers in September 2008.
Traders hit the "pause" button ahead of the news. Although the market was encouraged by manufacturing data out of China and the U.S. on Monday, and the Dow traded in a 182-point range throughout the day, it settled barely in the black, with a gain of 0.06%. The bulls proved a little more resilient on Tuesday, and the Dow climbed 0.58%.
The cavalry arrived Wednesday, as the midterm results became clear. Republicans repainted the electoral map red, easily taking control of the House of Representatives, and putting a dent in the Democrats' lead in the Senate. President Obama himself pronounced it a "shellacking." Then the Fed weighed in early in the afternoon with its plan for another round of monetary stimulus. The initial reaction was muted: Despite a brief spike and an equally brief slump immediately following the Fed announcement, the Dow meandered to a modest advance of 0.24%. Even so, both the Dow and the Nasdaq Composite (COMP) settled at two-year highs.
After a night to sleep on the meaning of it all, traders apparently decided Wednesday's news was pretty darn good. The Dow rocketed nearly 200 points right out of the gate on Thursday, and traders were unfazed even by an increase in new jobless claims. Retail sales reports also boosted sentiment, with consumers apparently more willing to loosen the purse-strings. By the close, the Dow recorded a 220-point advance, or 1.96%. The S&P 500 Index (SPX) and the COMP also settled at pre-Lehman levels, with the SPX boasting its first finish above 1,200 since May 2010.
And on the fifth day, we rested, or so it seemed. The Labor Department reported a much better-than-expected jobs growth figure on Friday, although not enough to reduce the unemployment rate. But the bulls had put away their party hats for the week. Still, the Dow inched ahead 0.08% for the day, and climbed a very respectable 2.9% for the week. The SPX, meanwhile, did even better, adding 3.6% for the week, while the COMP motored ahead 2.9%.
What the Trading Desk Is Expecting: Sideline Cash Could Extend Rally
By Todd Salamone, Senior Vice President of Research
"The lower expectations with respect to QE2, and a growing consensus that there is little post-event upside for stocks, could have bullish implications, to the extent that traders have acted on this perception by moving to the sidelines. Such actions coincidentally put a cap on the market, which we have witnessed during the past couple of weeks. But the actions might also generate a lower probability of a 'buy the rumor, sell the news' scenario developing and, in turn, increase the chances of a 'buy the news' situation if the expected outcomes come to fruition... the cautious tone among some investors may set up a year-end rally in the absence of a major disappointment next week."
Monday Morning Outlook, Oct. 30, 2010
Traders and investors braced for a "sell the news" reaction in the stock market, but much to their surprise, the news -- Republicans gained control of the House and the Fed announced $600 billion in Treasury purchases (QE2) -- sparked a major rally in U.S. indexes last week. In fact, the S&P 500 Index (SPX) pushed above potential resistance from its 80-month moving average for the first time since September 2008. Moreover, the index closed the week above its April 2010 high of 1,219.80.
Skepticism still prevails, particularly as it relates to Fed policy and the impact it will have on the economy. Technicians continue to preach caution, with worries about the high percentage of stocks trading above their 50-day moving average, thin volume, low realized volatility and a steep CBOE Market Volatility Index futures curve, although our research suggests the futures curve has a sketchy track record in predicting declines.
For now, bulls are in control, and there is a plethora of sideline cash from those who moved to the sidelines, anticipating a "sell the news" reaction to last week's events. Now, fund investors and under-invested long/short hedge funds stand ready to buy pullbacks, perhaps feeling the urge to play "catch up" as the year-end clock is only weeks away. Moreover, after 26 consecutive weeks now of outflows from domestic equity funds, one has to wonder if the retail investor will finally get bold enough to support the advance?
It appears many have missed out on the advance, as the majority of the SPX's move, from 1,125 in mid-September to the present 1,225, occurred over only about seven trading days, those unshaded in the graph below. Emotions of feeling "left out" could lay the foundation for a year-end rally.
Short covering related to expiring index and exchange-traded fund (ETF) put positions, which act as portfolio protection, could also work in favor of the bulls. With expiration of these options only two weeks away and a few major calendar events behind us, this short covering could be an additional market driver in the weeks ahead. As mentioned last week, the iShares Russell 2000 Index (RUT) experienced a major buildup of put open interest in the last few weeks, as a cautious tone hovered over the market. The strikes with heavy put open interest could also work against the bulls, if unforeseen negative news hits the market, as such strikes tend to act like magnets when sellers predominate. At present, however, the open interest configurations on major indexes and ETFs is bullish.
Working in favor of the bears is our "VIX Premium" indicator, which compares the level of the CBOE Market Volatility Index (VIX) to actual 20-day SPX historical volatility. Last week, the VIX traded at more than a 140% premium to the SPX's 20-day realized volatility. The difference in the two has since narrowed, but since early 2009, when the difference narrows from extreme levels, a market pullback soon followed. One difference from the past is that the VIX premium most recently exploded higher during a two-week trading range, whereas previously, it exploded higher during a rally.
As always, we are open to the fact that "anything can happen anytime." Therefore, continue to emphasize your long exposure, and keep your portfolio protection in place.
If you enjoy Monday Morning Outlook...
...why not check out Opening View, our daily preview of market activity? Each morning, we analyze the prior day, review the overnight markets, and monitor the morning wires to give you our special Schaeffer's take on the action, before the opening bell. Sign up here to have Opening View delivered straight to your inbox every morning.
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: Outperformers in the Last Two Months of the Year
By Rocky White, Senior Quantitative Analyst
Foreword: The S&P 500 Index (SPX) is up almost 10% this year, so money managers will be expected to post very impressive gains for 2010. The index is a popular yardstick by which funds are judged. It does not look good for a fund to underperform this benchmark. To avoid such embarrassment, you may have a lot of funds scrambling to catch up in the last two months of this year. How will they do that? One possibility is that they'll throw money at the high-flying stocks in hopes they'll keep flying right through the end of the year. That could mean those outperformers will continue to outperform in the next couple of months. In today's article, I test this theory by looking back over the last several years.
Valid Theory?: The theory is that money managers trying to "catch up" to a hot market, i.e., one that has performed well during the first 10 months of the year, will pump money into the high flyers in the final two months. To test this, I focused on years where the S&P 500 was up significantly through October. After applying some liquidity criteria, I broke down all the stocks into five brackets, depending on their return from January through October. Bracket No.1 includes those stocks with the lowest returns January through October. Bracket No. 2 includes the next worst performers -- and so on, until you get to bracket No. 5, which includes the stocks that performed the best.
Below is a table showing the data for 2009. The top performers, January through October, are in bracket No. 5 at the bottom of the table. Just as our theory would predict, those stocks did in fact perform the best over the last two months of the year. They averaged a return of about 15% (median of 13.4%). This was better than any of the other four brackets. The worst grouping of stocks was in the second bracket.
SPX 2009 returns for November through December
I didn't include 2008 because the market tanked all year, so a key criteria for our study, a strong performing benchmark, wasn't met. Below is the data for 2007. The market was up over 9% through October, which is about the time the market began to weaken before the 2008 crash. The S&P 500 was down about 5.2% for the remainder of the year, so no bracket shielded an investor from losses. However, if you had to have money in the market, those January-October outperformers were the best place to be. The fourth bracket was the only one that outperformed the S&P 500 (down 4.2% vs. the SPX down 5.2%). The bracket of best-performing stocks through October (bracket No. 5) was the next best bracket to be in.
SPX 2007 returns for November through December
The year 2006 again supports our theory. Bracket No. 5 was the top-performing bracket from November through December of that year.
SPX 2006 returns for November through December
I skipped 2004 and 2005 because the SPX was down or up only moderately those years through October. But in 2003 the index gained almost 20% through the first 10 months. However, this year our theory does not hold up. Not even close. The worst stocks through October were the best stocks for the rest of that year. The fifth bracket was awful at the end of 2003. All other brackets saw an average stock gain of at least 5%, but the fifth bracket had an average return that was negative.
SPX 2003 returns for November through December
Implications:– The last few times that the SPX was up significantly through October, we saw the stocks that performed well up to that point had a tendency to outperform other stocks in the last two months as well. Fund managers buying these stocks trying to catch up with the market may have contributed to this effect. However, it doesn't seem to be an infallible green light to dump money into big returning stocks this year. We would suggest taking the approach of our Expectational Analysis. However, below are the 25 S&P 500 stocks that have had the best return year-to-date. This list could be a good place to start.
This Week's Key Events:
Schaeffer's Editorial Staff
Here is a brief list of some of the key events this 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
* There are no major economic reports scheduled for Monday. Frontier Communications Corp. (FTR), Sysco Corp. (SYY), Warner Chilcott Plc (WCRX ), Clean Energy Fuels Corp. (CLNE), Clear Channel Outdoor Holdings Inc. (CCO), Convergys Corp. (CVG), Eagle Bulk Shipping Inc. (EGLE), LSK Solar Co. Ltd. (LDK), priceline.com Incorporated (PCLN), Silver Wheaton Corp. (SLW) and The Warnaco Group Inc. (WRC) will report earnings.
Tuesday
* The Commerce Department will report on September wholesale inventories. Ebix Inc. (EBIX), Fossil Inc. (FOSL), hhgregg Inc. (HGG), JA Solar Holdings Co. Ltd. (JASO), K12 Inc. (LRN), Solarfun Power Holdings Co. Ltd. (SOLF), Tyco International Ltd. (TYC), Starwood Property Trust Inc. (STWD), and URS Corp. (URS) are scheduled to issue their quarterly reports.
Wednesday
* We'll get the usual weekly report on crude inventories, along with the September trade balance figures. Scheduled to report earnings are Maidenform Brands Inc. (MFB), Macy's Inc. (M), Polo Ralph Lauren Corp. (RL), Sara Lee Corp. (SLE), and Cisco Systems Inc. (CSCO)
Thursday
* The weekly initial jobless claims report comes out on Thursday. Kohl's Corp. (KSS), Tim Hortons Inc. (THI), NVIDIA Corp (NVDA), SunPower Corporation (SPWRA) and The Walt Disney Company (DIS) will report earnings.
Friday
* The University of Michigan will deliver its first reading on consumer sentiment during November. Agilent Technologies Inc. (A), D.R. Horton Inc. (DHI), J.C. Penney Company Inc. (JCP) and Wendy's Arby's Group Inc. (WEN) will report earnings.
Traders applaud election results, new Fed stimulus
by Todd Salamone 11/6/2010 10:30 AM
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=103332
"Don't Fight the Fed," read the headline on Page 1 of The Wall Street Journal on Friday. The bulls agreed and the Dow Jones Industrial Average powered ahead 2.9% last week, finishing above 11,400. All three of the major market indexes are at year-to-date highs and at levels not seen since September 2008. Looking ahead, Todd Salamone, Senior Vice President of Research, observes that "for now, bulls are in control," but warns "anything can happen anytime," and advises keeping hedges in place. Next, Senior Quantitative Analyst Rocky White wonders whether money managers try to "catch up" in the last two months of the year by chasing stocks that have done well in the first 10 months. If so, the added buying pressure could provide yet another boost for these outperformers. But Rocky's survey finds a mixed bag of results. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: Fed Lights the Fuse
Schaeffer's Editorial Staff
The elections set the table, and the Fed lit the fuse, to mix a metaphor.
After treading water in the early part of the week while waiting for the Fed and election results, the Dow Jones Industrial Average soared more than 200 points on Thursday, with traders evidently approving both the Fed's restart of the money machine and the prospects of legislative gridlock in Washington, D.C. Thursday's bull rush put the Dow well above the April highs, and also reclaimed territory not explored since the fall of Lehman Brothers in September 2008.
Traders hit the "pause" button ahead of the news. Although the market was encouraged by manufacturing data out of China and the U.S. on Monday, and the Dow traded in a 182-point range throughout the day, it settled barely in the black, with a gain of 0.06%. The bulls proved a little more resilient on Tuesday, and the Dow climbed 0.58%.
The cavalry arrived Wednesday, as the midterm results became clear. Republicans repainted the electoral map red, easily taking control of the House of Representatives, and putting a dent in the Democrats' lead in the Senate. President Obama himself pronounced it a "shellacking." Then the Fed weighed in early in the afternoon with its plan for another round of monetary stimulus. The initial reaction was muted: Despite a brief spike and an equally brief slump immediately following the Fed announcement, the Dow meandered to a modest advance of 0.24%. Even so, both the Dow and the Nasdaq Composite (COMP) settled at two-year highs.
After a night to sleep on the meaning of it all, traders apparently decided Wednesday's news was pretty darn good. The Dow rocketed nearly 200 points right out of the gate on Thursday, and traders were unfazed even by an increase in new jobless claims. Retail sales reports also boosted sentiment, with consumers apparently more willing to loosen the purse-strings. By the close, the Dow recorded a 220-point advance, or 1.96%. The S&P 500 Index (SPX) and the COMP also settled at pre-Lehman levels, with the SPX boasting its first finish above 1,200 since May 2010.
And on the fifth day, we rested, or so it seemed. The Labor Department reported a much better-than-expected jobs growth figure on Friday, although not enough to reduce the unemployment rate. But the bulls had put away their party hats for the week. Still, the Dow inched ahead 0.08% for the day, and climbed a very respectable 2.9% for the week. The SPX, meanwhile, did even better, adding 3.6% for the week, while the COMP motored ahead 2.9%.
What the Trading Desk Is Expecting: Sideline Cash Could Extend Rally
By Todd Salamone, Senior Vice President of Research
"The lower expectations with respect to QE2, and a growing consensus that there is little post-event upside for stocks, could have bullish implications, to the extent that traders have acted on this perception by moving to the sidelines. Such actions coincidentally put a cap on the market, which we have witnessed during the past couple of weeks. But the actions might also generate a lower probability of a 'buy the rumor, sell the news' scenario developing and, in turn, increase the chances of a 'buy the news' situation if the expected outcomes come to fruition... the cautious tone among some investors may set up a year-end rally in the absence of a major disappointment next week."
Monday Morning Outlook, Oct. 30, 2010
Traders and investors braced for a "sell the news" reaction in the stock market, but much to their surprise, the news -- Republicans gained control of the House and the Fed announced $600 billion in Treasury purchases (QE2) -- sparked a major rally in U.S. indexes last week. In fact, the S&P 500 Index (SPX) pushed above potential resistance from its 80-month moving average for the first time since September 2008. Moreover, the index closed the week above its April 2010 high of 1,219.80.
Skepticism still prevails, particularly as it relates to Fed policy and the impact it will have on the economy. Technicians continue to preach caution, with worries about the high percentage of stocks trading above their 50-day moving average, thin volume, low realized volatility and a steep CBOE Market Volatility Index futures curve, although our research suggests the futures curve has a sketchy track record in predicting declines.
For now, bulls are in control, and there is a plethora of sideline cash from those who moved to the sidelines, anticipating a "sell the news" reaction to last week's events. Now, fund investors and under-invested long/short hedge funds stand ready to buy pullbacks, perhaps feeling the urge to play "catch up" as the year-end clock is only weeks away. Moreover, after 26 consecutive weeks now of outflows from domestic equity funds, one has to wonder if the retail investor will finally get bold enough to support the advance?
It appears many have missed out on the advance, as the majority of the SPX's move, from 1,125 in mid-September to the present 1,225, occurred over only about seven trading days, those unshaded in the graph below. Emotions of feeling "left out" could lay the foundation for a year-end rally.
Short covering related to expiring index and exchange-traded fund (ETF) put positions, which act as portfolio protection, could also work in favor of the bulls. With expiration of these options only two weeks away and a few major calendar events behind us, this short covering could be an additional market driver in the weeks ahead. As mentioned last week, the iShares Russell 2000 Index (RUT) experienced a major buildup of put open interest in the last few weeks, as a cautious tone hovered over the market. The strikes with heavy put open interest could also work against the bulls, if unforeseen negative news hits the market, as such strikes tend to act like magnets when sellers predominate. At present, however, the open interest configurations on major indexes and ETFs is bullish.
Working in favor of the bears is our "VIX Premium" indicator, which compares the level of the CBOE Market Volatility Index (VIX) to actual 20-day SPX historical volatility. Last week, the VIX traded at more than a 140% premium to the SPX's 20-day realized volatility. The difference in the two has since narrowed, but since early 2009, when the difference narrows from extreme levels, a market pullback soon followed. One difference from the past is that the VIX premium most recently exploded higher during a two-week trading range, whereas previously, it exploded higher during a rally.
As always, we are open to the fact that "anything can happen anytime." Therefore, continue to emphasize your long exposure, and keep your portfolio protection in place.
If you enjoy Monday Morning Outlook...
...why not check out Opening View, our daily preview of market activity? Each morning, we analyze the prior day, review the overnight markets, and monitor the morning wires to give you our special Schaeffer's take on the action, before the opening bell. Sign up here to have Opening View delivered straight to your inbox every morning.
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: Outperformers in the Last Two Months of the Year
By Rocky White, Senior Quantitative Analyst
Foreword: The S&P 500 Index (SPX) is up almost 10% this year, so money managers will be expected to post very impressive gains for 2010. The index is a popular yardstick by which funds are judged. It does not look good for a fund to underperform this benchmark. To avoid such embarrassment, you may have a lot of funds scrambling to catch up in the last two months of this year. How will they do that? One possibility is that they'll throw money at the high-flying stocks in hopes they'll keep flying right through the end of the year. That could mean those outperformers will continue to outperform in the next couple of months. In today's article, I test this theory by looking back over the last several years.
Valid Theory?: The theory is that money managers trying to "catch up" to a hot market, i.e., one that has performed well during the first 10 months of the year, will pump money into the high flyers in the final two months. To test this, I focused on years where the S&P 500 was up significantly through October. After applying some liquidity criteria, I broke down all the stocks into five brackets, depending on their return from January through October. Bracket No.1 includes those stocks with the lowest returns January through October. Bracket No. 2 includes the next worst performers -- and so on, until you get to bracket No. 5, which includes the stocks that performed the best.
Below is a table showing the data for 2009. The top performers, January through October, are in bracket No. 5 at the bottom of the table. Just as our theory would predict, those stocks did in fact perform the best over the last two months of the year. They averaged a return of about 15% (median of 13.4%). This was better than any of the other four brackets. The worst grouping of stocks was in the second bracket.
SPX 2009 returns for November through December
I didn't include 2008 because the market tanked all year, so a key criteria for our study, a strong performing benchmark, wasn't met. Below is the data for 2007. The market was up over 9% through October, which is about the time the market began to weaken before the 2008 crash. The S&P 500 was down about 5.2% for the remainder of the year, so no bracket shielded an investor from losses. However, if you had to have money in the market, those January-October outperformers were the best place to be. The fourth bracket was the only one that outperformed the S&P 500 (down 4.2% vs. the SPX down 5.2%). The bracket of best-performing stocks through October (bracket No. 5) was the next best bracket to be in.
SPX 2007 returns for November through December
The year 2006 again supports our theory. Bracket No. 5 was the top-performing bracket from November through December of that year.
SPX 2006 returns for November through December
I skipped 2004 and 2005 because the SPX was down or up only moderately those years through October. But in 2003 the index gained almost 20% through the first 10 months. However, this year our theory does not hold up. Not even close. The worst stocks through October were the best stocks for the rest of that year. The fifth bracket was awful at the end of 2003. All other brackets saw an average stock gain of at least 5%, but the fifth bracket had an average return that was negative.
SPX 2003 returns for November through December
Implications:– The last few times that the SPX was up significantly through October, we saw the stocks that performed well up to that point had a tendency to outperform other stocks in the last two months as well. Fund managers buying these stocks trying to catch up with the market may have contributed to this effect. However, it doesn't seem to be an infallible green light to dump money into big returning stocks this year. We would suggest taking the approach of our Expectational Analysis. However, below are the 25 S&P 500 stocks that have had the best return year-to-date. This list could be a good place to start.
This Week's Key Events:
Schaeffer's Editorial Staff
Here is a brief list of some of the key events this 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
* There are no major economic reports scheduled for Monday. Frontier Communications Corp. (FTR), Sysco Corp. (SYY), Warner Chilcott Plc (WCRX ), Clean Energy Fuels Corp. (CLNE), Clear Channel Outdoor Holdings Inc. (CCO), Convergys Corp. (CVG), Eagle Bulk Shipping Inc. (EGLE), LSK Solar Co. Ltd. (LDK), priceline.com Incorporated (PCLN), Silver Wheaton Corp. (SLW) and The Warnaco Group Inc. (WRC) will report earnings.
Tuesday
* The Commerce Department will report on September wholesale inventories. Ebix Inc. (EBIX), Fossil Inc. (FOSL), hhgregg Inc. (HGG), JA Solar Holdings Co. Ltd. (JASO), K12 Inc. (LRN), Solarfun Power Holdings Co. Ltd. (SOLF), Tyco International Ltd. (TYC), Starwood Property Trust Inc. (STWD), and URS Corp. (URS) are scheduled to issue their quarterly reports.
Wednesday
* We'll get the usual weekly report on crude inventories, along with the September trade balance figures. Scheduled to report earnings are Maidenform Brands Inc. (MFB), Macy's Inc. (M), Polo Ralph Lauren Corp. (RL), Sara Lee Corp. (SLE), and Cisco Systems Inc. (CSCO)
Thursday
* The weekly initial jobless claims report comes out on Thursday. Kohl's Corp. (KSS), Tim Hortons Inc. (THI), NVIDIA Corp (NVDA), SunPower Corporation (SPWRA) and The Walt Disney Company (DIS) will report earnings.
Friday
* The University of Michigan will deliver its first reading on consumer sentiment during November. Agilent Technologies Inc. (A), D.R. Horton Inc. (DHI), J.C. Penney Company Inc. (JCP) and Wendy's Arby's Group Inc. (WEN) will report earnings.
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