| Followers | 71 |
| Posts | 12229 |
| Boards Moderated | 1 |
| Alias Born | 04/01/2000 |
Sunday, February 20, 2011 12:15:46 PM
Monday Morning Outlook: Three Simple Reasons to Remain Bullish
The calm before the storm might last longer than you think
by Todd Salamone 2/19/2011 12:35 PM
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=105142
Stocks ended higher for the third consecutive week last Friday, despite an ever-growing list of reasons to be skeptical. Against this backdrop, Senior Vice President of Research Todd Salamone picks apart the bears' laundry list of concerns, and spins it into three solid reasons why contrarians should remain invested in this market. (Never one for irrational exuberance, Salamone still recommends protective puts -- especially with low volatility creating some option-buying bargains.) Meanwhile, Senior Quantitative Analyst Rocky White takes a long-term look at analyst ratings to determine the market's most unfairly maligned sector. Finally, we wrap up with a quick preview of the holiday-shortened week ahead, plus a few sectors of note.
Recap of the Previous Week: Bulls Make It Three in a Row
Schaeffer's Editorial Staff
There was plenty of news last week that could have spooked traders right out of the market -- but instead, stocks continued their gravity-defying climb. Sure, inflationary data came in a little hotter than expected; and yes, jobless claims were slightly steeper than forecast. News from across the globe was similarly dreary, as China upped its reserve requirements for banks again, and a wave of sociopolitical unrest rippled through Iran and Bahrain.
Apparently, though, investors have already priced in all of their panicky feelings about rising inflation, high unemployment, turmoil in the Middle East and slower growth in China. Instead, traders turned their attention to a few new bright spots. On Wednesday alone, in fact, Wall Street learned of an upwardly revised growth forecast from the Fed, a fresh round of merger-and-acquisition news, and an uptick in new home construction. Amid this hot-and-cold data, the market more or less stumbled its way higher throughout the week.
The Dow Jones Industrial Average (DJIA -- 12,391.25) ended the week up 0.96%, and settled above 12,300 on a weekly closing basis for the first time since June 13, 2008. In fact, the Dow wrapped up Friday's session just hundredths of a point from its intraday peak of 12,391.29, which marked its highest price since June 6, 2008. So far in February, the blue-chip average has added 4.19%.
The S&P 500 Index (SPX -- 1,343.01) racked up a weekly gain of 1.04%, with the broad-market measure up 4.42% for February. On Friday, the SPX topped out at 1,344.07, in territory the index hasn't charted since June 19, 2008.
The Nasdaq Composite (COMP -- 2,833.95) eked out the slimmest weekly win of 0.87%, but its February advance now stands at a more-than-respectable 4.96%. The index found a Friday high of 2,840.51, representing its best price since Oct. 31, 2007.
However, it's the Russell 2000 Index (RUT -- 834.82) that's really leading the charge higher this month, with the small caps up 6.86% for February. On the other hand, the CBOE Market Volatility Index (VIX -- 16.43) has shed 15.87% month-to-date.
What the Trading Desk Is Expecting: More Calm Ahead, or a Looming Storm?
By Todd Salamone, Senior Vice President of Research
"... 1,333.58 on the SPX is double the index's March 2009 low. We point this out because the SPX ran into its 'double October 2002 low' in May 2007, before a major topping process took place during the next several months. The SPX went on to experience only one monthly close above 2002's double low at 1,537.26, before ultimately peaking in October 2007.
For short-term traders, 1,333.58 is worth noting as a potential resistance or hesitation area. But longer term, we think the sentiment backdrop is one of much more investor caution and worry relative to 2007, implying the 'double-low' resistance could be a speed bump, at worst, and not a major inflection point like four years ago."
--Monday Morning Outlook, Feb. 12, 2011
In case you haven't heard -- which seems doubtful, given the attention this data point received last week in various media outlets -- the S&P 500 Index (SPX) rallied and closed last week above the level that marked a doubling of its March 2009 intraday low. For those of you who put more emphasis on closing lows, 1,353.06 would mark a doubling of the March 9, 2009 closing low of 676.03. So, some might argue, "We're not there yet!"
Regardless, the SPX's double from its intraday 2009 low received a lot of media attention. But there doesn't seem to be a lot of euphoria attached to this milestone, with the contrarian implication being that there could be more firepower left to keep the uptrend intact. In fact, after scanning various articles from major publications, the laundry list of present worries seems to go as follows:
* Stocks have come "too far, too fast"
* Transports have not participated in the rally
* Volume has been lackluster
* Recent inflows into domestic mutual funds suggest retail investors are late
* Low volatility could be a sign of complacency, or a "calm before the storm"
* Geopolitical turmoil in Egypt, Bahrain, and Iran
* On the corporate earnings front, margins have peaked
* Inflationary data indicates significantly higher food prices
* Government stimuli and the Fed may have created another bubble, and the risk of stimulus efforts being unwound is growing as the economy improves
From a contrarian perspective, bulls like to see a long, lengthy list of worries that range from geopolitical to fundamental to technical, as this is indicative that, despite strong price action:
1. Plenty of cash remains on the sidelines that could still be deployed;
2. Portfolio insurance is actively being purchased, which makes stocks less vulnerable to panic selling when negative headlines hit the newswires; and
3. Short sellers are still actively engaged in the market -- pressuring stocks coincidentally, but providing short-covering potential in the future.
Let's address a few of the aforementioned worries, beginning with retail investors coming back into the marketplace. Is this behavior among retail investors really a warning signal for stocks? The fact is, according to Investment Company Institute (ICI) data, there were outflows of $327 billion from 2007 through 2010. During the past five weeks, there have been inflows of $17 billion, or 5% of the 2007-2010 outflows.
We have often noted that in the absence of hedge fund buying during the past two years, the market struggled to make headway, as retail investors pulled cash out of domestic funds, leaving traditional fund managers with little flexibility to make new investments. Therefore, a contrarian takeaway is that with retail investors possibly in the early innings of returning to the stock market, this new and additional source of demand may prove to be bullish, even as many view it with a skeptical eye.
Technical warnings signs such as "too far, too fast" and lackluster volume are complaints we have heard on an intermittent basis since the fall of 2009. This isn't to say that low volume cannot precede a short-term sell-off or a shift in momentum -- but the point is that we have heard this before, and the fears are nothing new in the context of this impressive uptrend. Moreover, remember not so long ago when we were cautioned that financials were not participating in advances? The same basic worry is present, with the only difference being that we're now hearing concerns about the lagging transportation stocks.
Finally, it should be noted that while low-volatility periods have previously given way to higher-volatility "stormy" periods, low volatility was a four-and-a-half-year fixture after the 2000-2002 bear market, when the 20-day SPX historical volatility ranged between 6 and 16 from May 2003 through March 2007.
Yes, this low-volatility environment eventually gave way to a high-volatility environment, which is why we are hearing cautionary warnings now. But as you can see by the first chart below, anyone who "sold the calm" in 2003 or 2004 missed a huge rally in the SPX.
Moreover, the current "calm" is nothing compared to 2003-2007. On the next chart below, note that SPX 20-day historical volatility has ranged between 6 and 16, but only since late September. Will there be four more years of this? Based on the past, it is certainly a possibility, but many investors may not be thinking this way.
The point is, instead of letting the "calm" keep you out and viewing it as an imminent warning sign, take advantage of this low volatility by purchasing cheap portfolio insurance, as option prices have become much more inexpensive relative to the storm that preceded this calm. The insurance allows you to stay invested, while offering you protection in the event that an unexpected event with negative market repercussions should emerge.
Indicator of the Week: Breaking Down Analyst Ranks by Sector
By Rocky White, Senior Quantitative Analyst
Foreword: Keeping an eye on the ratings doled out by Wall Street analysts is a good way to assess sentiment. Though they are professionals, analysts have a tendency to be behind the curve in predicting stock prices. In fact, we (and others) have done studies showing that stocks with a lot of "sell" recommendations tend to outperform those stocks with a large amount of "buy" recommendations. This week, I'm taking a look at where analysts stand on a sector-by-sector basis, and measuring how those stocks have performed during the last year. Hopefully, this will reveal some sectors where analysts are behind the curve, and tell us which sectors may outperform going forward.
Percentage of "Buys" by Sector: In the analysis below, I grouped S&P 500 Index (SPX) stocks by sector, and found the percentage of "buy" recommendations as of one year ago to compare with the current analyst ratings configuration. I also found the median return of the stocks within each sector. The last column shows the difference in percent "buys" from one year ago through today. A positive number means Wall Street analysts have become more bullish on that sector, while a negative number means they've become more bearish. I measured the sector's performance by the median one-year return of the stocks within that sector. The table is sorted with the best-performing sector at the top, and the worst at the bottom.
Analyst Ranks by Sector
Analysis: What I looked for in the table above are sectors that have had very strong returns, yet analysts have not scrambled to become more bullish. Electronics and semiconductors both fit under the wider umbrella of tech stocks, and both of those sectors share this trait. Semiconductors are especially obvious. It's one of the top-performing sectors by median return, but analysts have become even more bearish on the group over the last year. One year ago, 51% of analyst recommendations were a "buy," and today, just 46.5% of recommendations are a "buy" within that sector. The pessimism shown by analysts toward this technically strong sector has very bullish implications.
Plus, compare the semiconductor stocks to a couple of sectors at the bottom of the table. Aerospace/airline companies and the Wall Street sector have significantly lagged the market during the past year, with a median return right around 15% (remember, the SPX is up 25% over this time frame). However, analysts have become even more bullish on those sectors, with the percentage of "buys" going from about 48% to the upper 50s year-over-year.
This Week's Key Events: Fourth-Quarter GDP Punctuates a Short Week
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
* The market will be closed Monday in observance of Presidents Day.
Tuesday
* On the economic front, Tuesday brings us the S&P Case-Shiller home price index for December, the consumer confidence index for February, and the latest Richmond Fed business activity survey. It's a busy day for earnings, too, with reports from Hewlett-Packard (HPQ), Wal-Mart Stores (WMT), RadioShack (RSH), Macy's (M), and Home Depot (HD) slated to hit the Street.
Wednesday
* Wednesday brings us the ICSC-Goldman Sachs chain store sales index for the week ended Feb. 19, as well as existing home sales data for January. Meanwhile, Fed Presidents Hoenig (of Kansas City) and Plosser (of Philadelphia) are scheduled to deliver remarks on the economy. Notable earnings reporters include Lowe's (LOW), Saks (SKS), Toll Brothers (TOL), and Transocean (RIG).
Thursday
* The government's weekly report on crude supplies will hit the Street a day late, due to Monday's holiday. Traders will also receive their regularly scheduled update on weekly jobless claims. General Motors (GM), Target (TGT), Salesforce.com (CRM), and The Gap (GPS) will share the earnings spotlight.
Friday
* We wrap up the week with a pair of key economic reports: the preliminary estimate on fourth-quarter gross domestic product (GDP), and February's consumer sentiment index from Reuters/University of Michigan. On the earnings docket, J.C. Penney (JCP), American International Group (AIG), and Tenet Healthcare (THC) will reveal their latest quarterly results.
The calm before the storm might last longer than you think
by Todd Salamone 2/19/2011 12:35 PM
http://www.schaeffersresearch.com/commentary/observations.aspx?ID=105142
Stocks ended higher for the third consecutive week last Friday, despite an ever-growing list of reasons to be skeptical. Against this backdrop, Senior Vice President of Research Todd Salamone picks apart the bears' laundry list of concerns, and spins it into three solid reasons why contrarians should remain invested in this market. (Never one for irrational exuberance, Salamone still recommends protective puts -- especially with low volatility creating some option-buying bargains.) Meanwhile, Senior Quantitative Analyst Rocky White takes a long-term look at analyst ratings to determine the market's most unfairly maligned sector. Finally, we wrap up with a quick preview of the holiday-shortened week ahead, plus a few sectors of note.
Recap of the Previous Week: Bulls Make It Three in a Row
Schaeffer's Editorial Staff
There was plenty of news last week that could have spooked traders right out of the market -- but instead, stocks continued their gravity-defying climb. Sure, inflationary data came in a little hotter than expected; and yes, jobless claims were slightly steeper than forecast. News from across the globe was similarly dreary, as China upped its reserve requirements for banks again, and a wave of sociopolitical unrest rippled through Iran and Bahrain.
Apparently, though, investors have already priced in all of their panicky feelings about rising inflation, high unemployment, turmoil in the Middle East and slower growth in China. Instead, traders turned their attention to a few new bright spots. On Wednesday alone, in fact, Wall Street learned of an upwardly revised growth forecast from the Fed, a fresh round of merger-and-acquisition news, and an uptick in new home construction. Amid this hot-and-cold data, the market more or less stumbled its way higher throughout the week.
The Dow Jones Industrial Average (DJIA -- 12,391.25) ended the week up 0.96%, and settled above 12,300 on a weekly closing basis for the first time since June 13, 2008. In fact, the Dow wrapped up Friday's session just hundredths of a point from its intraday peak of 12,391.29, which marked its highest price since June 6, 2008. So far in February, the blue-chip average has added 4.19%.
The S&P 500 Index (SPX -- 1,343.01) racked up a weekly gain of 1.04%, with the broad-market measure up 4.42% for February. On Friday, the SPX topped out at 1,344.07, in territory the index hasn't charted since June 19, 2008.
The Nasdaq Composite (COMP -- 2,833.95) eked out the slimmest weekly win of 0.87%, but its February advance now stands at a more-than-respectable 4.96%. The index found a Friday high of 2,840.51, representing its best price since Oct. 31, 2007.
However, it's the Russell 2000 Index (RUT -- 834.82) that's really leading the charge higher this month, with the small caps up 6.86% for February. On the other hand, the CBOE Market Volatility Index (VIX -- 16.43) has shed 15.87% month-to-date.
What the Trading Desk Is Expecting: More Calm Ahead, or a Looming Storm?
By Todd Salamone, Senior Vice President of Research
"... 1,333.58 on the SPX is double the index's March 2009 low. We point this out because the SPX ran into its 'double October 2002 low' in May 2007, before a major topping process took place during the next several months. The SPX went on to experience only one monthly close above 2002's double low at 1,537.26, before ultimately peaking in October 2007.
For short-term traders, 1,333.58 is worth noting as a potential resistance or hesitation area. But longer term, we think the sentiment backdrop is one of much more investor caution and worry relative to 2007, implying the 'double-low' resistance could be a speed bump, at worst, and not a major inflection point like four years ago."
--Monday Morning Outlook, Feb. 12, 2011
In case you haven't heard -- which seems doubtful, given the attention this data point received last week in various media outlets -- the S&P 500 Index (SPX) rallied and closed last week above the level that marked a doubling of its March 2009 intraday low. For those of you who put more emphasis on closing lows, 1,353.06 would mark a doubling of the March 9, 2009 closing low of 676.03. So, some might argue, "We're not there yet!"
Regardless, the SPX's double from its intraday 2009 low received a lot of media attention. But there doesn't seem to be a lot of euphoria attached to this milestone, with the contrarian implication being that there could be more firepower left to keep the uptrend intact. In fact, after scanning various articles from major publications, the laundry list of present worries seems to go as follows:
* Stocks have come "too far, too fast"
* Transports have not participated in the rally
* Volume has been lackluster
* Recent inflows into domestic mutual funds suggest retail investors are late
* Low volatility could be a sign of complacency, or a "calm before the storm"
* Geopolitical turmoil in Egypt, Bahrain, and Iran
* On the corporate earnings front, margins have peaked
* Inflationary data indicates significantly higher food prices
* Government stimuli and the Fed may have created another bubble, and the risk of stimulus efforts being unwound is growing as the economy improves
From a contrarian perspective, bulls like to see a long, lengthy list of worries that range from geopolitical to fundamental to technical, as this is indicative that, despite strong price action:
1. Plenty of cash remains on the sidelines that could still be deployed;
2. Portfolio insurance is actively being purchased, which makes stocks less vulnerable to panic selling when negative headlines hit the newswires; and
3. Short sellers are still actively engaged in the market -- pressuring stocks coincidentally, but providing short-covering potential in the future.
Let's address a few of the aforementioned worries, beginning with retail investors coming back into the marketplace. Is this behavior among retail investors really a warning signal for stocks? The fact is, according to Investment Company Institute (ICI) data, there were outflows of $327 billion from 2007 through 2010. During the past five weeks, there have been inflows of $17 billion, or 5% of the 2007-2010 outflows.
We have often noted that in the absence of hedge fund buying during the past two years, the market struggled to make headway, as retail investors pulled cash out of domestic funds, leaving traditional fund managers with little flexibility to make new investments. Therefore, a contrarian takeaway is that with retail investors possibly in the early innings of returning to the stock market, this new and additional source of demand may prove to be bullish, even as many view it with a skeptical eye.
Technical warnings signs such as "too far, too fast" and lackluster volume are complaints we have heard on an intermittent basis since the fall of 2009. This isn't to say that low volume cannot precede a short-term sell-off or a shift in momentum -- but the point is that we have heard this before, and the fears are nothing new in the context of this impressive uptrend. Moreover, remember not so long ago when we were cautioned that financials were not participating in advances? The same basic worry is present, with the only difference being that we're now hearing concerns about the lagging transportation stocks.
Finally, it should be noted that while low-volatility periods have previously given way to higher-volatility "stormy" periods, low volatility was a four-and-a-half-year fixture after the 2000-2002 bear market, when the 20-day SPX historical volatility ranged between 6 and 16 from May 2003 through March 2007.
Yes, this low-volatility environment eventually gave way to a high-volatility environment, which is why we are hearing cautionary warnings now. But as you can see by the first chart below, anyone who "sold the calm" in 2003 or 2004 missed a huge rally in the SPX.
Moreover, the current "calm" is nothing compared to 2003-2007. On the next chart below, note that SPX 20-day historical volatility has ranged between 6 and 16, but only since late September. Will there be four more years of this? Based on the past, it is certainly a possibility, but many investors may not be thinking this way.
The point is, instead of letting the "calm" keep you out and viewing it as an imminent warning sign, take advantage of this low volatility by purchasing cheap portfolio insurance, as option prices have become much more inexpensive relative to the storm that preceded this calm. The insurance allows you to stay invested, while offering you protection in the event that an unexpected event with negative market repercussions should emerge.
Indicator of the Week: Breaking Down Analyst Ranks by Sector
By Rocky White, Senior Quantitative Analyst
Foreword: Keeping an eye on the ratings doled out by Wall Street analysts is a good way to assess sentiment. Though they are professionals, analysts have a tendency to be behind the curve in predicting stock prices. In fact, we (and others) have done studies showing that stocks with a lot of "sell" recommendations tend to outperform those stocks with a large amount of "buy" recommendations. This week, I'm taking a look at where analysts stand on a sector-by-sector basis, and measuring how those stocks have performed during the last year. Hopefully, this will reveal some sectors where analysts are behind the curve, and tell us which sectors may outperform going forward.
Percentage of "Buys" by Sector: In the analysis below, I grouped S&P 500 Index (SPX) stocks by sector, and found the percentage of "buy" recommendations as of one year ago to compare with the current analyst ratings configuration. I also found the median return of the stocks within each sector. The last column shows the difference in percent "buys" from one year ago through today. A positive number means Wall Street analysts have become more bullish on that sector, while a negative number means they've become more bearish. I measured the sector's performance by the median one-year return of the stocks within that sector. The table is sorted with the best-performing sector at the top, and the worst at the bottom.
Analyst Ranks by Sector
Analysis: What I looked for in the table above are sectors that have had very strong returns, yet analysts have not scrambled to become more bullish. Electronics and semiconductors both fit under the wider umbrella of tech stocks, and both of those sectors share this trait. Semiconductors are especially obvious. It's one of the top-performing sectors by median return, but analysts have become even more bearish on the group over the last year. One year ago, 51% of analyst recommendations were a "buy," and today, just 46.5% of recommendations are a "buy" within that sector. The pessimism shown by analysts toward this technically strong sector has very bullish implications.
Plus, compare the semiconductor stocks to a couple of sectors at the bottom of the table. Aerospace/airline companies and the Wall Street sector have significantly lagged the market during the past year, with a median return right around 15% (remember, the SPX is up 25% over this time frame). However, analysts have become even more bullish on those sectors, with the percentage of "buys" going from about 48% to the upper 50s year-over-year.
This Week's Key Events: Fourth-Quarter GDP Punctuates a Short Week
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
* The market will be closed Monday in observance of Presidents Day.
Tuesday
* On the economic front, Tuesday brings us the S&P Case-Shiller home price index for December, the consumer confidence index for February, and the latest Richmond Fed business activity survey. It's a busy day for earnings, too, with reports from Hewlett-Packard (HPQ), Wal-Mart Stores (WMT), RadioShack (RSH), Macy's (M), and Home Depot (HD) slated to hit the Street.
Wednesday
* Wednesday brings us the ICSC-Goldman Sachs chain store sales index for the week ended Feb. 19, as well as existing home sales data for January. Meanwhile, Fed Presidents Hoenig (of Kansas City) and Plosser (of Philadelphia) are scheduled to deliver remarks on the economy. Notable earnings reporters include Lowe's (LOW), Saks (SKS), Toll Brothers (TOL), and Transocean (RIG).
Thursday
* The government's weekly report on crude supplies will hit the Street a day late, due to Monday's holiday. Traders will also receive their regularly scheduled update on weekly jobless claims. General Motors (GM), Target (TGT), Salesforce.com (CRM), and The Gap (GPS) will share the earnings spotlight.
Friday
* We wrap up the week with a pair of key economic reports: the preliminary estimate on fourth-quarter gross domestic product (GDP), and February's consumer sentiment index from Reuters/University of Michigan. On the earnings docket, J.C. Penney (JCP), American International Group (AIG), and Tenet Healthcare (THC) will reveal their latest quarterly results.
Discover What Traders Are Watching
Explore small cap ideas before they hit the headlines.
