Market Commentary - 5.25.2008
May 25, 2008
The bears finally were able to take control this past week, as the market made a new high for this up-trend at 1440 and then dipped back down below the all important support level of 1383 as it also broke through the trend line that has been in place since mid-March:
While most of the major indexes have gone from overbought to near oversold levels fairly quickly and this could just be a minor pullback before this rally continues, we believe this past week was a near term market top, and we will see sideways to down action in the coming weeks. We expect the market will make a new bear market low over the next several months, but it will be led by choppy action.
Earnings
Just a handful of earnings reports this holiday-shortened week:
Tuesday - Borders Group (BGP), Shanda Interactive (SNDA),
Wednesday – American Eagle Outfitters (AEO), Men’s Wearhouse (MW), Polo Ralph Lauren (RL)
Thursday – Big Lots (BIG), Costco (COST), Dell (DELL), HJ Heinz (HNZ), J Crew (JCG), Joy Global (JOYG), Marvel Technology (MRVL), Royal Bank of Canada (RY), Sears (SHLD)
Friday – Lion’s Gate Entertainment (LGF), Tiffany & Co (TIF)
Economic Data: Even though it’s a short week, there is a lot of data this week as doubt of a second half recovery and record commodity prices start to weigh on the mind of investors once again:
Tuesday – Consumer Confidence, New Home Sales, S&P / Case-Shiller Home Price Index
Wednesday – Durable Goods Orders,
Thursday – Preliminary GDP (Revised), Crude Inventories, Unemployment Claims
Friday – Existing Home Sales
Strategy/Outlook
Since most sectors have seen significant gains since mid-March, such as transports which includes stocks that made new all-time highs this past week, we are weighted to the short side entering this trading week. Oil & Gas related stocks are starting to look toppy, and the risk/reward doesn’t favor long trades – most charts look like the one below (EOG) – a medium-term uptrend with support a few points below. We would wait for a break of the 2 trend lines before we would consider short trades, but will wait for a pullback and bounce off support to initiate long trades:
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Market Commentary - 5.18.2008
May 18, 2008
Options expiration - another week and more of the same – oil makes a new all-time high and the S&P makes a new high for this up-trend. Whether this turns out to be just a bear market rally for equities or a continuation of the bull market, we expect a near-term top for the major indexes in the next few weeks. While it’s nice to think the Fed has “changed the game” and prevented any more downside risks to the economy and stocks, we are still not buying the story. The S&P is now sitting just below its 200 day moving average, and we will see if this acts as resistance or if the index sails right through like it has just about every other resistance level encountered since mid-March:
Nothing goes straight up forever, but lately it seems like there is no end to the explosive run commodity prices and energy stocks have had over the last couple of months. It’s really hard to argue fundamentally that retail, trucking, and consumer services companies can be rallying in the face of $4+ gas prices, but buyers have stayed in control for this while rally, albeit on very light volume. There is still a large amount of cash on the sidelines, and it’s still too early for the “all clear” buy signal.
Earnings
The action picks up a little on the earnings front, with retail stocks dominating – although we only list a sample here, there are a bunch of smaller mall-based retailers reporting as well, such as Zumiez, Zale, Pacific Sunwear and Hot Topic. We all know that the discount shops (Wal-Mart, CostCo, etc) are thriving in this environment, but what about everyone else?
Monday – Campbell Soup (CPB), DryShips (DRYS), Excel Maritime (EXM), Lowe’s (LOW)
Tuesday – Analog Devices (ADI), AutoZone (AZO), Hewlett Packard (HPQ), Home Depot (HD), Intuit (INTU), Medtronic (MDT), MF Global (MF), Saks (SKS), Staples (SPLS), Target (TGT)
Wednesday – BJ’s Wholesale (BJ), Eaton Vance (EV), Limited Brands (LTD), NetEase (NTES), PetSmart (PETM), Salesforce.com (CRM)
Thursday – Aeropostale (ARO), Ann Taylor (ANN), Barnes & Noble (BKS), CA, Dick’s Sporting Goods (DKS), GameStop (GME), Gap (GPS), Hormel Foods (HRL), Suntech Power (STP)
Economic Data
Lately the majority of economic data, while still showing signs of near-term weakness, has come in better than consensus estimates, and the market has reacted positively. The same old story is still being told – namely that there will be a second half recovery and the worst is behind us. There isn’t anything on the calendar this week that will change that, but rather the focus will be on commodity prices and how that has/will affect retailer earnings and consumer spending.
Monday – Leading Indicators
Tuesday – Retail Same-Store Sales, PPI, Redbook
Wednesday – MBA Mortgage Purchase Applications, Petroleum Inventories, FOMC Minutes
Thursday – Weekly Unemployment Claims, Natural Gas Inventories
Friday – Existing Home Sales
Strategy/Outlook
With the VIX sitting roughly right where it was at the market top in October, and as momentum has taken us into extreme overbought levels in a lot of cases, we like the reward/risk on the short side a lot better than the long side right now. Energy stocks are due for a pullback at some point and we don’t want to be caught holding the bag on the long side, so we are tightening our stops on names like OXY – both to lock in the nice profits we’ve seen and to limit downside risk.
There are a lot of stocks that are overextended right now, but there are also a bunch that have broke out of important price ranges, and we favor the reward/risk for long trades on those names rather than the stocks that have run up 100+% in just a few months.
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Market Commentary - 5.11.2008
May 11, 2008
The positive breadth the market has displayed since mid-March seems to have dissipated, and this market action is looking more and more to be a display of a classic bear market rally. The S&P 500 appears to have topped at around 1420 and failed to hold above the 50% retracement level of this now 7 month decline.
While the broader market indexes have started to pull back, oil continues to make a new high seemingly every day, in the face of a stronger dollar, increasing US inventories and weakening demand, as well as signs of slower than expected growth in the world economy. And while food prices have come down from the stratosphere since April, food and energy prices have increasingly become headline news, while any positive momentum from earnings of non-financial companies can’t hide the fact that things will probably get worse before they get better.
Earnings
This week, the tide turns as economic data is at the forefront and earnings season starts to wind down – only a few names we’re watching closely:
Monday - Radian Group (RDN) and Standard Pacific (SPF)
Tuesday - Canadian Solar (CSIQ), Hitachi (HIT), TJX, Whole Foods (WFMI)
Wednesday - Agilent (A), Ctrip (CTRP), Deere (DE)
Thursday – Autodesk (ADSK), Hewlett Packard (HPQ), JC Penny (JCP), Kohls (KSS), Urban Outfitters (URBN)
Friday - Abercrombie & Fitch (ANF)
Economic Data
A busy week as concerns about the real economy, and increasing worries about food and energy prices have trumped relatively strong non-financial earnings. Record high oil prices on a daily basis have started to weigh on the minds of investors, as they consider the deflation in the things we own/want (houses, investments, flat screens) vs. inflation in the things we need (food, gas, medical care), as well as stagnant salaries, increasing unemployment, and a weak dollar.
Tuesday – Import & Export Sales, Business Inventories, and Retail Sales
Wednesday – CPI and Crude Inventories
Thursday – Unemployment Claims, NY Empire and Philly Fed Manufacturing Index, Capacity Utilization and Industrial Production
Friday – Michigan Consumer Sentiment, Building Permits and Housing Starts
Strategy/Outlook
Not much has changed – we’re still operating under the bear market assumption, so we’re looking for weak stocks where expectation are too high and we can sell into strength, and strong stocks in up-trends where we can buy on the dips. One of the themes we have highlighted has been the divergence of record high energy prices and some energy stocks which have been unable to make new highs and were poised for a fall like Exxon Mobil (XOM). On the other hand, there are a bunch of pure oil and gas producers which we believe have a lot of room to run such as Occidental Petroleum (OXY).
While it seems like financial, homebuilder, and retail stocks have already priced in a recession and have fallen 50+ percent from their highs, there are also stocks like FedEx (FDX) which have only just started to fall, and as their earnings warning on Friday shows, the market is still way too optimistic with growth assumptions, and stock prices will eventually fall to reflect realistic expectations.
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Market Commentary - 5.04.2008
May 4, 2008
The major indexes continued to rally last week as the theme was “not as bad as it could have been”. Non-financial earnings were for the most part better than expected and economic growth was tepid but was still marginally positive, with jobs numbers still negative but better than forecast. While all the indexes have now broken through the resistance levels we discussed last week and have been in a strong uptrend since mid-March, we are still viewing this as another bear market rally for several reasons:
- A 5 year bull market has never been followed by anything less than an 8 month bear market averaging a 30% peak to trough – we are only now roughly 5 month into this decline and at its lows the indexes were barely off 20%;
- This rally has displayed very weak volume, a lot of cash is still on the sidelines waiting for the “all clear” signal, and technical indicators are displaying negative divergence suggesting we are near the top of this rally, and all of the indexes are still sitting below their long term moving averages;
- Fundamentally nothing much has changed – between dismal housing and construction data, weakening consumer spending and earnings, and a weakening job market, we are not in the camp that believes the worst is behind us. Although the S&P 500 broke through the 50% retracement level from the October top to the February bottom, it closed just below this level (1416.54):
Although we are about 2/3rds of the way through earnings season, this week is still active on that front, while the economic calendar is fairly light. The news that Microsoft is abandoning its Yahoo bid will probably not bode well for the tech sector, and all eyes will most certainly be on Cisco’s earning on Tuesday. We are focusing a lot these days on sectors in strong uptrends – energy, agriculture, commodities – while they have recently pulled back, we still see these sectors in long term bull markets and there will be a lot of earnings reports this week to watch.
Earnings
Most of the majors have reported, but still a heavy dose of earnings this week:
Monday – Alpha Natural Resources (ANR), Anadarko Petroleum (APC), Cleveland-Cliffs (CLF), Goldcorp (GG), McKesson Corp (MCK), Principal Financial Group (PFG), Tidewater (TDW), Vulcan Materials (VMC), Weight Watchers (WTW)
Friday – Allianz (AZ), Clear Channel (CCU), Gold Fields Ltd (GFI), Huntsman (HUN), Sotheby’s (BID), Southern Union (SUG)
Tuesday – Barrick Gold (ABX), Blue Nile (NILE), Cisco (CSCO), Fannie Mae (FNM), Kinross Gold (KGC), Legg Mason (LM), MGM Mirage (MGM), Molson Coors Brewing (TAP), NYSE Euronext (NYX), PG&E Co (PCG), PSEG (PEG), Walt Disney (DIS)
Wednesday – British American Tobacco (BTI), CompuCredit (CCRT), Devon Energy (DVN), Foster Wheeler (FWLT), Marsh & McLennan (MMC), Nationwide (NFS), Pioneer Natural Resources (PXD), Quicksilver Resources (KWK), DirectTV (DTV), Total S.A. (TOT), Transocean (RIG), Yamana Gold (AUY)
Thursday – Activision (ATVI), Agnico-Eagle Mines (AEM), AIG, Assured Guarantee (AGO), Atwood Oceanics (ATW), Celgene (CELG), Dawson Geophysical (DWSN), Edison International (EIX), El Paso Corp (EP), Mirant (MIR), Nvidia Corp (NVDA), Priceline (PCLN), Public Storage (PSA), Toyota Motor (TM), Unilever (UN), VeriSign (VRSN)
Economic Data
Light economic week, peppered with a few speeches by Fed governors
Monday – ISM Services
Wednesday – Non-Farm Productivity, Pending Home Sales, Crude Inventories, Consumer Credit
Thursday – Initial Unemployment Claims, Wholesale Inventories
Friday – Trade Balance
Strategy/Outlook
We are looking for strong sectors to buy which have supporting fundamentals, such as energy, agriculture, and commodities, while we would look to sell sectors which have had a huge run up in the last month and a half which we don’t believe have fundamentals to back up the rally, such as investment banks and retail/consumer service companies. Like we said, we still believe this bear market rally is near a top, and are looking for attractive entries to the downside.
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