Catching a Falling Safe
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Catching a falling safe

Week Ending March 6, 2009
EquiTrend.com

Stocks fall, a reversal afoot?
Leaders fall with the pack
Earnings - Any one have a tourniquet?
Bad economic news but good market action?
Looking forward

INDEX
Mar6-09
Feb 27-09
Change
Change%
INDU
6,626.94
7,062.93
-435.99
-6.17%
DJT
2,194.99
2,499.07
-304.08
-12.17%
SPX
683.38
735.09
-51.71
-7.03%
COMPX
1,293.85
1,377.84
-83.99
-6.10%
RUT
351.05
389.02
-37.97
-9.76%
EEM
21.1
21.23
-0.13
-0.61%

Last Week
INDEX
Feb 27-09
Feb 20-09
Change
Change%
INDU
7,062.93
7,365.67
-302.74
-4.11%
DJT
2,499.07
2,698.87
-199.80
-7.40%
SPX
735.09
770.05
-34.96
-4.54%
COMPX
1,377.84
1,441.23
-63.39
-4.40%
RUT
389.02
410.96
-21.94
-5.34%
EEM
21.23
21.52
-0.29
-1.35%


Quote of the week
"All the major [US] banks are basically insolvent at this point. Until that changes and until credit gets flowing again, it's hard to see how we have any real recovery." - David P. Prokupek, chief executive of the Denver portfolio manager Geronimo Partners in Bloomberg article Thursday.

Stocks sink again but is there a reversal afoot?
Stocks sank for the fourth consecutive week of across the board losses for the major indexes but an interesting thing happened in the last hour of trading. At 3:26PM Friday New York time, the Dow Industrial declines stopped almost on a dime and the index reversed course. By close the Dow had rallied 159 points pushing it into positive territory for the day. Although it was too little too late to make much of a difference on the week, the manner and strength with which the move occurred was heartening.  The Dow had been quite oversold on the weekly chart so the question is whether this is simply an oversold bounce or the beginning of a longer-term move. Given how beaten up stocks are (Citigroup stock now selling around $1/share), any positive news has the potential to ignite a big vacuum-powered, short covering rally. That stocks rallied into the weekend is also bullish - it means that investors are willing to risk holding stocks over the weekend and that shorts have decided it prudent to exit their positions.

It is also interesting to note that investor sentiment tracked by the American Association of Individual Investors (AAII) hit its most bearish level in the index's history with more than 70% of respondents surveyed expecting further drops in the market this week, according to Bespoke. It is at times like these when selling pressure abates after a capitulation that powerful rallies are born.

Technically Speaking
Leaders fall with the pack
This week Dan's Sunday March 1 portfolio of 11 stocks to watch included Apple, (AAPL), Baidu.com (BIDU), ProShares UltraShort Oil (DUG), Google (GOOG), Goldman Sachs (GS), Itron (ITRI), Myriad Genetics (MYGN), Holders Oil Serv. (OIH), Potash (POT), Research in Motion (RIMM), and Visa (V). This portfolio's performance was the middle of the pack this week with a drop of 7% versus a gain of more than 2% last week and a drop of 2.4% two weeks ago.

 


Figure 1 - Five-day performance of Zanger's last Sunday pix (green) compared to the S&P500 (SPX), the Dow Jones Industrial Average (DJX), Dow Transports (DTX), Nasdaq Composite (IXIC), Russell 2000 (RUT) and MSCI Emerging Market ETF (EEM). Data courtesy of The Zanger Report, performance chart courtesy of VectorVest.com.


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Weekly volumes were high for the second consecutive week for the major indexes but as we mentioned the late day rally Friday was bullish. But the Dow and S&P are now back to where they were in 1996 which is bad news for anyone holding stocks and especially bad news for those like one famous Saudi investor whose motto is "I never sell!" Factor inflation into the mix and these long-term holders are down substantially. It is at times like these that the sheer folly of a simplistic buy & hold strategy becomes painfully clear.  That the Dow Transports dropped nearly double that of the Dow Industrials is a concern. But it is one which is offset by the fact that the Emerging Market ETF (EEM) suffered a modest 0.61% drop.

Not surprisingly given the big drop in stocks, the Market Volatility Index (VIX) rose this week to 49.33 from 46.35 last week (and 49.30 two weeks ago). What is surprising, however, is that the VIX didn't rise more. Investors are becoming accustomed to drops in stocks and the fear factor, while still high from an historic perspective, appears to be abating. It is important to point out that the VIX is a short-term indicator, however.       

Since rebounding off its December 5 bottom, the 19 commodity NYFE CRB Index has been moving higher and it held its ground this week to close at 351.55 down from 352.45 last week but up from 345.94 two weeks ago. Since hitting a high of 611.51 in July the index is still down 42% from its peak.  

After anther the big surge in gold to $1001.10/oz two weeks ago, the precious metal dropped to a low of $900.40/oz but then rallied to close at $942.70 this week, which was very close to its $942.60 close last week. As we have mentioned in past weeks, volume and open interest had been declining which is bearish, especially given the recent potential double top two weeks ago. To confirm the double top, gold will have to break down through the pattern neckline at $700/oz so this pattern has little short-term trading value. However, if this happens, it will imply a downside double top target on gold of just below $400/oz but we are getting ahead of ourselves. We still believe gold has the potential to drop further in the coming weeks in spite of what the fundamental gold pundits and dollar bears would have you believe.  

Speaking of double tops, the US Dollar Index looks to be at a potential double top peak of its own as it closed at 88.59 this week, just above its peak of 88.46 during the week of November 21, 2008, and up marginally from 88.15 last week. Since bottoming in July, the U.S. Dollar Index is up more than 23%. 

Crude oil futures firmed for the second consecutive week to close at $47.56/bbl up from $44.12 last week and $39.80 two weeks ago. Volume was well above average this week, which makes the move even more bullish, providing further evidence to support our contention of a capitulation bottom from which prices have a good potential to rally.  This take is further backed by the rally in the Baltic Dry Index given its habit of leading oil in the last few months. Oil is down nearly 70% from its mid-summer high of $147.20 and could rally on any supply problems or brighter economic news.

The Baltic Dry Index, an indicator that tracks the cost of shipping dry goods by sea, rose again this week to 2225 from 1986 last week and has now risen 236% from is December 5 low. Not only is the bullish for oil (which has demonstrated a habit of following behind the BDI) but for the economy as well as it shows that demand for cargo transport is climbing.

The U.S. bank prime rate and the Fed funds target rate held steady again this week at 3.25% and 0.00% - 0.25% respectively while the effective Fed funds rate firmed to 0.24% (from 0.23% last week). Meanwhile, the 3-month London Interbank Offered Rate (LIBOR*) jumped again to 1.2925% (1.26438% last week).  This compares to LIBOR 52-week high of 4.81875% last October. 

Meanwhile Freddie Mac mortgage rates firmed again this week to 5.15% (from 5.07% last week) for the 30-year fixed mortgage while the one-year adjustable rate mortgage (ARM) ticked up to 4.86% (from 4.81% last week). 

*LIBOR is the benchmark for $900 billion in subprime mortgage loans which typically adjust to it every six months. Corporations around the world have the interest rates on roughly $9 trillion in debt pegged to LIBOR and rates on more than $380 trillion in derivative interest rate swaps also are based on LIBOR. About 6 million U.S. mortgages, including the vast majority of subprime home loans as well as 41% of prime ARMs are linked to LIBOR.

Earnings
Q4 earnings - balance sheets hemorrhage red ink
With a total of 3028 companies accounted for in the ninth week of Q4-08 earnings reporting season (up from 2641 last week), the net loss on continuing operations widened to ($200) billion (from ($123.91) billion last week) versus +$124.1 billion in Q4-07) which works out to a change of -262% from Q4-07. This compares to -197% last week, -171.7% two weeks, -156.4% three weeks ago, -150.7% four weeks ago, and -46% in the opening week. The final result for Q3-08 was -62% from Q3-07.
Earnings continue to experience their biggest drops since first turning negative and we expect this trend to continue at least into next reporting season. 

According to economist Robert Shiller, the SPX price is are 12.8 times trailing ten-year earnings (PE) as of last week, the lowest this long-term indicator has been since 1986.

Economic Reports
More bad news, but good action?
It is evident this week that investors have become accustomed to bad economic news and unless the news is more abysmal that expected, accept it as the norm. Look what happened on Friday. Expectation was for a loss of 652,000 jobs in February and the actual loss was 651,000. Stocks initially dropped but then rallied into the close. And the unemployment rate jump from 7.6% in January to 8.1% in February didn't rattle them much either. (As our readers know, this is a lagging indicator like most economic statistics and pretty much all fundamentals). Friday's strong close in stocks was a clear indication of bad news, good action showing a positive shift in investors' attitudes about stocks.

Other numbers of note to report were construction spending, that fell 3.3% in January (versus -1.4% in December), a modest rise of $1.76 billion in January consumer credit (versus -$7.5 billion in December) and flat February ISM manufacturing (35.8) and service (41.6) index readings.

Synopsis
Ready...Set...
We are in cash right now according to the latest Equitrend signal which went to cash on Wednesday (March 4) we are currently on the sidelines. But based on a number of technical indicators, this latest rally could well be the long signal we have been waiting for. Stay tuned for a possible signal change this week.

Stories of interest this week...

Recipe for Disaster: The Formula That Killed Wall Street
http://www.wired.com/print/techbiz/it/magazine/17-03/wp_quant

U.S. Bubble Collapse to Be Worse Than Japan's, CLSA's Wood Says
http://www.bloomberg.com/apps/news?pid=20601101&sid=aU6QD7.BBkO8&refer=japan

John Kerry Is Last Guy You Want Helping Banks: Caroline Baum
http://www.bloomberg.com/apps/news?pid=20601039&sid=a.mZaJRMjQb4&refer=home

U.S. Bankruptcy Filings Surged 37% in February Over Prior Year
http://www.bloomberg.com/apps/news?pid=20601110&sid=aJ5pO8_lc.Uo

Mortgage ‘Cram-Down' Bankruptcy Bill Passes U.S. House 234-191
http://www.bloomberg.com/apps/news?pid=20601087&sid=a1Sk4ikpjYTE&refer=home

Darth Wall Street Thwarting Debtors With Credit Swaps
http://www.bloomberg.com/apps/news?pid=20601109&sid=aZjMcuIoat7U&refer=home

Stimulus Cash to Spur Inflation, Commodity Rally: Chart of Day
http://www.bloomberg.com/apps/news?pid=20601109&sid=aIwFmyvJJiv4&refer=home

Absolute-Return Funds Promise the Holy Grail: Jane Bryant Quinn
http://www.bloomberg.com/apps/news?pid=20601212&sid=aHISy61O4hCc&refer=home

U.S., European Stocks Drop as China Signals No Added Stimulus
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJzhelPXoKYQ&refer=home

Geithner Says U.S. Financial Rescue ‘Might Cost More' (Update3)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQldZDlQpohE&refer=home

Obama Says Now May Be Good Time to Invest in Stocks
http://www.bloomberg.com/apps/news?pid=20601110&sid=a.GyK8EEnseY

On the lighter side...

"I don't know about you, but I don't want government bureaucrats making business decisions -- even if Washington politicians are experts when it comes to wasteful spending." - Caroline Baum


Working for your wealth,

John M. McClure
John M. McClure, President & CEO
EquiTrend, Inc.





Posted 03-09-2009 10:35 AM by John M. McClure