This is what happened last week…
Last Friday’s gave us a Jobs Report that is somewhat flawed and a number of other stories, like the beginning of the lame earnings reports that most of us have come to expect.
Crude Oil ended the week at 40.45 bbl -1.25, the US$ rallied some, and a Fed rep noted that the recession would likely extend past Q-2. People started to put some money back to work in mutual funds and corporate bonds
I had a discussion with some of my pals last week about the how things were in the US back in 1980, and although this is bad, it was bad then too. But opportunities abounded then and do once again now in our collective opinions. So if we are back to the early 1980’s then we are back in the land of huge investment opportunity.
On page 2, there is a Q & A between Mike (he asked the Q’s) and me. It bought the “glass is half full” POV once again to a clear prospective. 20-odd years ago we had come out of a decade of being in “irons” and had big hopes for a new era, the Reagan Era; now we are in a similar boat but not alone on the sea; interest rates are at record lows in the West and we have big hopes for another new era, the Obama Era.
Friend, major advancements and fortunes came out of the Reagan Era and expect that to happen again, the odds favor it.
The collective thinking of the central bankers has turned to stimulus, and stimulus it will be like never before in history. No one knows what will be the result, but hopes are running high that the bleeding will stop, the wounds will heal, scar tissue will form and we and the rest of the world will forge ahead into economic bliss.
We all know that the Chinese word for crisis is weiji and that means danger/opportunity. You do not need to be Chinese to understand what that means in the investment world.
The market indices are in good shape on last week’s pullback; the financials got hammered some but the leaders held support levels on the test lower during the day on low volume as they made higher lows as the Bears weaken. However, today whoever is left will be back to work in Wall Street, Bulls and Bears alike, and this is a week of high anticipation as we run up to the Inauguration on January 20.
There is a Wall Street adage that I learned from Gene Morgan, “Stocks climb a Wall of Worry”. And we all know that most folks are worried.
Stay tuned…
Below is the short Interview that my pal Mike did with me last week on investing in the Stock Market as I reminisced, good thing he recorded it and transcribed it for us…
Question: Tell me how you got into investing, specifically in small-caps.
Answer: I was curious about investing as far back as the 60s, and my passion for investment research took on meaning after I had a chance encounter with Warren Buffett, in 1967, through my friend Edward Delaney, a Managing Director of Merrill Lynch. Buffett told me, “Paul, this is all you need to know about the stock market; do your research, when you find a stock you want to buy, buy it and if the next day the price gets cut in half buy more if you really like it, if not, sell it, take your loss, and move on.” That was when he and Charlie Munger were just beginning their Berkshire Hathaway investment vehicle, and the DJIA, if I recall correctly, was around 400.
My involvement in investing in small-cap stocks came from a former president of my development company, United Homebuilders of America. I bought my first “penny” stocks in 1983, and learned about pattern recognition and charting, as well as how that applied to commodities, such as wheat and silver, at the same time.
We had sold the company to a labor union pension fund and I was semi-retired at 44. My friend went on to found a computer software company in the early years of the revolution, and I bought several million original issue shares of the placement at $.03. Three years later, that stock was $27.00 a share. That’s about 325,000% return after I had my original investment back. I had also bought 100 shares of each of the DJIA components back in 1981; the entire cost was about $30,000, which I held for over 10+ years, and which yielded 1000% return. Yes, that was a good experience, but nowhere even close to my return on investment in the “penny” stock issues. And I have done it more than once.
Back then, the country was in recession coming out of the Carter Administration and interest rates were over 20%; no one was lending, no one could buy a home, and my personal line of credit of $50K was summarily canceled by a new bank manager that did not even know me, even though my credit was pristine. If this sounds familiar, it’s because many of the same conditions seem to be forming now, but because I learned how to make serious money in the stock market, all that didn’t matter.
Question: How can stocks reflect the full extent of information that can be acquired when all the facts aren’t in usable form?
Answer: I had brokerage accounts at Prudential Bache, Merrill Lynch and a small L.A. firm named C. L McKinney and Company. The Big Guys would not let me buy penny stocks, period, but I could buy them at McKinney’s firm, I just had to sign the papers that stated they did not solicit my business. My best strategy was to take advantage of the information gap, and the best place to start was in the small-cap arena.
Smart investing involves research, and I am dogged in my quest for all the information I can find. In those days, one had to rely on whatever your broker could produce, or you could write to the company, or even travel to the target company’s trade shows or annual meetings to ferret out whatever facts you could uncover.
Today, the Internet provides all the information you could possibly want and, thanks to the tightened rules of the SEC, small and micro caps must post all their relevant information to achieve a “full disclosure” status. Unless you personally know the operatives of a company you’re interested in, and their plans, or you are attracted by a product or suite of intellectual properties, my advice is to stay away from the “skull and crossbones” usually preceding a quote on the Pink Sheets that means their filings are not up to date. There is usually a reason.
As an investment, small-capitalization stocks represent an entire class that, over the years, has been ostracized and entirely overlooked, primarily on the basis of information scarcity, in favor of mid- and large-cap stocks. The large-cap sector has been the favorite of the big houses, mainly because of the higher commissions, and is today the preferred capitalization investment choice by the financial community as a whole, even as icon company issues lay bleeding and/or dying on the side of the road.
So, I reasoned, investing in small-caps would immediately give me a few extra steps out of the starting gate simply because they were being ignored. I wanted to make a lot of money, but I did not want a lot of risk by investing in the wrong horse. Ever since I seriously learned about money, I knew that risk was inherent, but I also found out that money is a brainless commodity; it needs your help, hence research, because it can do nothing on its own.
Question: Why do you prefer to invest in small-cap stocks, and what benefits do they offer investors?
Answer: I have never forgotten my initial 325,000% profit investing in small-caps more than a quarter of a century ago, and I am therefore hooked on small-cap investing. Despite some of the ambiguity that comes from treading into uncertain waters, my next investment in a small-cap stock worked flawlessly and I was able to make a quick 50% on my invested capital.
The main reason for investing in small, micro, and mini-cap stocks is that they have a proven and long history of outperforming all other asset classes. The last statistics I saw on the performance of penny stocks showed that during a 79-year period, returns have outperformed large-cap stocks by several hundred percent.
The second reason is that an investor gains great personal satisfaction and pride in looking for and finding value in a stock that others have ignored, neglected, and/or failed to correctly appraise. Small-cap stocks fit that mold perfectly.
Now, as the US markets enters this new phase, I believe that investments in small-cap stocks will be better positioned to deal with the economic uncertainty that lies ahead.
It is now clear that bigger does not necessarily mean better, and the best investment choice is the one that is most likely to be nimble and adaptable to change. My point of view remains that small-cap stocks have the distinct advantage going forward.
Last year in anticipation of the Market Bunge Jump that occurred in September I decided to search for some “Little Gems” and bring that feature of my Report back after many years on hiatus. There are lots of big gainers on the horizon now.
Stay tuned…
Technical Snapshot: Technicals on the week ended January 12, 2009
U.S. stocks on Friday fell for a third straight session, leaving the equities market with weekly losses, as investors reacted to the government’s layoff count for December, which cast last year as the worst for labor since World War II ended in 1945. The Dow Jones Industrial fell 143.28 points, or 1.6%, to 8,599.18, leaving the blue-chip index down 4.8% for the week. The S&P 500 declined 19.38 points, or 2.1%, to stand at 890.35, translating into a weekly loss of 4.5%. The Nasdaq Composite dropped 45.42 points, or 2.8%, leaving the technology-laden index down 3.7%.
Market Fact: The S&P is on Sale, and there are bargains among the S&P 500 lowest-priced issues (below US$10/shr), a group that currently numbers roughly 80 issues, or 16% of the index. Most are down more than 50% this year, amid the worst Bear Market in years.
Best Quotes of the Week
Best Technical Quote of the Week: “Stocks climb a Wall of Worry.” Gene Morgan
Best Scary Quote of the Week: “Fundamentally, we’re facing a whole new ball game; we thought we knew how to treat the disease of recession. We were able to give it the right medicine and basically had it under control. Now we’ve discovered there’s a new strain of the disease that requires a different kind of treatment, and our understanding of that treatment is very limited.” said Boston College economist Peter Gottschalk.
Best Quote on the Stock Market: “If the big picture if wrong then you can be certain you will find details out of place.” Paolo Antoni
Best Quotes on the state of the economy: “There’s been nothing of the magnitude of what the incoming administration is contemplating, certainly not as intentional policy in the modern era,” -Adam Posen, deputy director of the Peterson Institute for International Economics in Washington.
Best Political Quote of the Week: “This is a relief for the government, whether they will be in power for long or not depends on their performance.” -Thitinan Pongsudhirak, director of the Institute for Strategic and International Studies at Chulalongkorn University in Bangkok about the lastest political developments in Thailand.
Best Quote on Risk: “If you don’t fix the financial system, you’re going to linger in the wind for a very long time,” said Harvard economist Kenneth Rogoff.
Best Optimistic Quote of the Week: “The paradox and the promise of this moment is the fact that there are millions of Americans trying to find work, even as all around the country, there is so much work to be done.” President-elect Barack Obama, on his economic stimulus plan
The Gold Quote: “It’s simple, really; demand is soaring, supplies are plummeting, and if you don’t buy Gold now, you may not get the chance to (buy it) later.” Luke Burgess, Managing Editor, Gold World
Best Overall Quote of the Week: I’m very worried about my job,” said Ellen Whittington, 32, who works for a German automotive company, in Cincinnati.
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My pal Wally Stein’s Words of Wisdom
The fundamental argument for the huge stimulus has little to do with analysis of past plans or economic theories. What’s driving it is the fact that the U.S. and most other countries are in a largely unforeseen and terrifying mess. Other than waiting for the problem to burn itself out, the world’s central bankers see few alternatives but to return to Keynes and stimulus. So, stimulate they will.
This Week’s 10 11 Big Stories +
1. Hyundai, Ford (F) shine at Detroit Auto Show: The Hyundai Genesis took the title of “North American Car of the Year,” and the Ford F-150 is the Truck of the Year, as the results of balloting by auto writers around the country was announced Sunday in Detroit.
2. GM kicked off Detroit Auto Show with a host of new vehicles: General Motors Corp (GM) opened the 2009 North American International Auto Show in Detroit Sunday with what CEO Rick Waggoner described as a look at a “smarter, smaller and more fuel-efficient” coming century for the troubled automaker. Michigan Gov. Jennifer Granholm led the parade, which included the production model of the anticipated Chevrolet Volt plug-in electric, a Cadillac electric concept car and a Chevy Spark subcompact capable of 40 mpg.
3. Citigroup and Morgan Stanley in talks: Citigroup (C) is in talks to sell its Smith Barney brokerage unit and may even seriously consider a joint venture with Morgan Stanley (MS) according to media reports last Friday.
4. Robert Rubin to leave Citigroup: Robert Rubin, President Clinton’s former Treasury Secretary, plans to leave Citigroup after criticism of his role in the financial crisis. Rubin is senior counselor and a director at Citi, which has suffered US$20B in losses in the past year and succumbed to a government bailout of at least $45 billion. Citigroup’s troubles cast the spotlight on Rubin, who received US$150M in pay since 1999, excluding stock options.
5. GMAC Chairman Merkin resigned: GMAC Financial Services Chairman, Ezra Merkin resigned from the company’s board last Friday in accordance with an order by the U.S. Federal Reserve System’s Board of Governors that granted the company’s application to become a bank holding company. GMAC said it would reconstitute its board of directors no later than March 24.
6. Hearst will sell Seattle Post-Intelligencer: Hearst Corp. will sell the Seattle Post-Intelligencer, the oldest morning newspaper in the state of Washington, due to “unacceptable” level of losses. If it is unable to find a buyer within 60 days, Hearst will consider other options, including a move to a digital-only operation or a complete shutdown.
7. Crude Oil falls for fourth session on U.S. jobs data: Crude-oil futures fell Friday for a 4th consecutive session, ending the week with their biggest weekly loss in five weeks, after government reports showed that the US, the world’s biggest Crude Oil consumer, lost the most jobs in 2008 since World War II. Crude Oil for February delivery closed down 87 cents, or 2.1%, at US$40.83 bbl on the New York Mercantile Exchange. Earlier it dropped to as low as US$39.38 bbl, falling below US$40 bbl for the first time this year. Crude Oil ended the week down 12%, the biggest percentage decline since the week ended Dec. 5, when it lost 25% over five sessions.
8. Qualcomm plans to challenge Intel for dominance: Qualcomm plans to challenge Intel for dominance in the fast growing market for mini laptop computers, or net books, and expects many companies to use its chips in devices this year. Intel’s Atom chips power most net books, but Paul Jacobs, chief executive of the leading US mobile phone chip maker, expects Qualcomm’s Snapdragon to break that trend this year.
9. Lloyds TSB Bank to forfeit US$350M on U.S. violations: Lloyds TSB Bank will forfeit US$350M in connection with violations of the International Emergency Economic Powers Act, the US Department of Justice said. The violations relate to transactions Lloyds illegally conducted on behalf of customers from Iran, Sudan and other countries on the US sanctions list. Lloyds agreed to forfeit the funds as part of deferred prosecution agreements with the Justice Department and the New York County District Attorney’s Office
10. Satyam financial chief arrested and charged: Srinivas Vadlamani, the chief financial officer of Satyam Computer Services Ltd. arrested on Saturday, joining other senior managers, according to India media reports, citing Hyderabad police. A police spokesman told Reuters that the CFO was charged with criminal conspiracy, cheating and forgery of accounts.
11. Judge expected to rule Monday on Madoff jailing: A federal judge is expected to rule today whether or not Bernard Madoff must go to jail for violating terms of a court order freezing his assets. The online edition of The Wall Street Journal reported that US Magistrate Judge Ronald Ellis’ decision on revoking Madoff’s bail comes after Madoff and his wife mailed valuables to friends and family in late December. Madoff, a money manager, is alleged to have committed fraud resulting in more than US$50B in investor losses.
This week’s big story: US loses most jobs since WWII The US economy lost more than 500K jobs in December for the second month in a row, making 2008 the worst year for job losses since 1945 and intensifying pressure on Congress to pass a fiscal stimulus. The number of jobs lost during the year reached 2.6m, while the unemployment rate, 4.4% before the credit crisis, jumped to 7.2 % in December, its highest level in 16 years
Really Big Story: Illinois’ Supreme Court ruled Burris Senate appointment valid: The Illinois Supreme Court ruled that Roland Burris’ appointment to the U.S. Senate is valid and that Secretary of State Jesse White does not need to validate the appointment. The state’s high court said nothing in state law requires White to sign the appointment.
Big Breaking Story: US President elect Obama promises to overhaul TARP: Barack Obama expressed disappointment on Sunday with the Bush administration’s handling of the first US $350B tranche of the financial sector rescue and pledged greater support for struggling homeowners once he takes charge. His promise to overhaul the Troubled Asset Relief Program (Tarp) came a day after the president-elect again expanded the goals of his proposed fiscal stimulus, which he says could create or save up to 4m jobs over the next two years.
On the World Scene: Pirates release Saudi super tanker: A Saudi Arabian super tanker, the Sirius Star, owned by Saudi Aramco, Saudi Arabia’s national oil company, hijacked in November by Somali pirates, was released after the tanker-nappers received a ransom of US$ 3M, shown widely on TV being parachuted down to the ship. Irony is that five pirates drowned immediately after splitting the loot. The body of one washed up yesterday with US$153,000 in his jeans. C’est La Guerre.
At the Movies: ‘Gran Torino’ revs up weekend box office. Clint Eastwood’s pic pulls in $29 million.
Warner Bros. sped to the top of the domestic box office this weekend as Clint Eastwood’s urban drama “Gran Torino” registered an estimated $29 million with a turbocharged expansion into wide release.
This Coming Week’s Economic Data
Tuesday, January 13
December Treasury Budget (2:00): -$33.0B expected, -$48.3B past
Wednesday, January 14
December Retail Sales (8:30): -1.1% expected, -1.8% past
Retail Sales ex-auto, December (8:30): -1.2% expected, -1.6% past
Business Inventories, November (10:00): -0.5% expected, -0.6% past
Crude Oil inventories (10:30): 6.68M past
Thursday, January 15
Initial jobless claims (8:30): 467K past
December Core PPI (8:30): 0.1% expected, 0.1% past
PPI, December (8:30): -1.9% expected, -2.2% past
Philadelphia Fed, January (10:00): -35.0 expected, -32.9 past
Friday, January 16
December Core CPI (8:30): 0.1% expected, 0.0% past
CPI, December (8:30): -1.0% expected, -1.7% past
Capacity Utilization, December (9:15): 74.7% expected, 75.4% past
Industrial Production, December (9:15): -0.8% expected, -0.6% past
Michigan Sentiment-Prelim, January (9:55): 60.0 expected, 60.1 past
Keith K. Hatanaka’s Food for Thought on Deflation
Distinction between Good and Bad Deflation
The onset and persistence of deflation can reflect a variety of factors, and the resulting deflation can be ‘Good’ or ‘Bad’. Consider an economy initially at a full-employment equilibrium, given by the intersection of Aggregate Demand (AD) and Aggregate Supply (AS). A sufficiently large negative demand shock that shifts the aggregate demand from AD to AD’ can push the economy to a deflationary region with declining prices and lower output. This type of deflation is ‘bad’, because it could reflect a severe cyclical downturn, the bursting of an asset price bubble or excessively tight policies. The effects of the shock could be amplified through deterioration in confidence and expectations of declining prices, exacerbating the initial deflationary impact.
The alternative to a demand shock is a positive supply shock that shifts the aggregate supply curve downwards to AS’, where output is higher, even while prices are declining. This type of deflation is ‘good’ and can arise from a variety of factors, including technological innovation and productivity growth, gains from an improvement in the terms of trade as a result of a large decline in the prices of imported goods, or heightened expectations of long-term political and economic stability.
It should be pointed out, however, that once prices start declining, the risk of adverse dynamics of deflation is heightened, even if it were initially triggered by positive supply shocks.
A Confluence of Deflationary Forces: Supply Shocks
From the supply side, the bursting of the international commodity price bubble triggered by intensification of the global financial deleveraging since September has caused the prices of raw materials (e.g., crude oil, iron ore, metals) imported by China to decline sharply, representing a powerful positive terms-of-trade shock. Moreover, there has been a strong supply response over time to high pork prices, which has been the key driver for China’s food price inflation since 2007. These positive supply shocks will likely result in headline deflation in 1H09, in our view.
As a heavy user and net importer of raw industrial materials, China’s domestic producer prices tend to be closely correlated with the relevant international prices. The recent near-freefall in the CRB Index for raw industrials suggests that China’s PPI inflation will drop rather sharply from its current relatively high levels (e.g., 6.6%Y in October) into negative territory over the coming months.
The decline in PPI inflation will likely put downward pressure on non-food CPI inflation. Given the enormous production capacity in China’s manufacturing sector and fierce competition pressures among firms, cost savings as a result of low input prices tend to be passed through to end users.
The recent round of CPI inflation has been primarily caused by a sharp rise in food price inflation, which in turn was due to a surge in the prices of meat (especially pork). The high prices of pork, together with policy measures to subsidize production, have over time induced a strong supply response. Meat prices have stabilized and edged down since summer 2008. Given the high base, as long as the price levels stop rising, meat price inflation (i.e., the year-on-year change of price levels) should start to decline rather sharply. And now even the level of pork prices has started to decline. Given the current trends, we estimate that food price inflation will slide into negative territory by 1Q09, unless there is a substantial increase in grain prices. However, we do not expect a meaningful rise in grain prices anytime soon, given: i) the significant decline in international grain prices; and ii) the bumper grain harvest in China in 2008.
A Confluence of Deflationary Forces: Demand Shocks
From the demand side, the impact of policy tightening implemented since late 2007 – featuring the austere administrative credit control – has helped to rein in the rapid expansion of money and credit. The attendant disinflationary impact will likely become more pronounced in the coming months, given the usual lag effect.
Further weakening in exports represents a negative external demand shock that could also be deflationary. China’s past experiences suggest that a significant decline in export growth should have a meaningful disinflationary/deflationary impact on the economy. China has suffered two episodes of deflation in recent history: one during the Asian Financial Crisis and the other in the aftermath of the NASDAQ stock bubble burst. The deflation either coincided with or occurred in the immediate aftermath of a collapse in export growth.
Deflation in 2009: ‘Good’ or ‘Bad’?
Despite still relatively high CPI and PPI inflation at the current juncture, we believe that a perfect storm for deflation is gathering strength under the surface and is expected to bring about a deflationary impulse in 1H09, which may morph into persistent deflation in 2H09 and beyond, barring an aggressive policy response up front.
Deflation is not always a bad thing. However, it is very difficult to make a distinction between ‘Good’ and ‘Bad’ deflation in practice, given the entwining supply and demand shocks. Our best judgment is that the potential deflation that we envisage to emerge in 1H09 will be a mixture of ‘good’ and ‘bad’ deflation, with the former likely dominating the latter.
Here’s why:
First, the potential deflation, or drop in price level on a year-on-year basis, in 1H09 will likely reflect the high base in 1H08. The surge in prices for both international commodities and domestic raw materials in 1H08 has been largely driven by speculative demand, stemming from investors’ need to hedge against a weak US dollar and expectations of further price increases, in our view. By the same token, the subsequent sharp correction of these prices in a near-freefall fashion since 3Q08 has reflected a massive unwinding of these speculative positions (by commodity investors) and destocking (by commodity users), as the global financial market leveraging intensified suddenly in the aftermath of the bankruptcy of a major financial institution in the US. This is more of a financial market event than a real economic one. From China’s perspective, this is a positive supply shock, in our view.
Second, the bulk of China’s food price increase took place between 2H07-1H08, mainly reflecting a tight supply of pork. The high pork prices have since induced a strong supply response over time and, as a result, food prices have stabilized and started to decline since mid-year. The resulting year-on-year decline in food prices should therefore be treated as ‘Good’ deflation.
Third, the ‘Bad’ deflation stemming from the two types of negative demand shocks – tight monetary policy in 1H08 and weak external demand – will take a bit longer to show, as suggested by the historical relationship.
Entering 2H09, deflationary pressures may ease, as the positive supply effect will likely phase out. The negative demand shocks will instead become the primary deflationary forces. In this context, whether the headline deflation in 1H09 will persist into 2H09 hinges on policy responses, in our view. Like inflation, deflation is also ultimately a monetary phenomenon. The policy tasks are twofold: i) to undo the previous tightening effect and stimulate real domestic demand with a view to offsetting the external weakness; and ii) to prevent deflationary expectations from getting entrenched, which may set off a deflationary spiral and turn ‘good’ inflation into ‘bad’ inflation. This would entail strong, pre-emptive policy responses, in our view.
Inflation Forecasts
We revise our CPI forecast for 2009 to -0.8% from 1.5%. We forecast headline CPI deflation at -0.9%Y in 1H09 and -0.7%Y in 2H09. The key driver of headline deflation is food prices, and we forecast that food price deflation will average -2.8%Y in 1H09 and -0.75%Y in 2H09. Non-food CPI inflation will decline in 1H09, averaging 0.5%Y, and slide into negative territory in 2H09, averaging -0.6%Y.
We expect headline CPI deflation could drop to as low as -1.8%Y in February 2009, mainly reflecting the high base effect due to a temporary jump in food prices in the aftermath of the snowstorm in early 2008.
The easing in deflationary pressures envisaged for 2H09 in our forecasts reflects the effect of policy stimulus that will likely be able to arrest the decline in the price levels. This highlights the risks to our forecasts. If policy responses are weaker or later than expected, deflation could become more serious, in our view.
Implications
The initial deflationary impulse due to positive supply shocks should bring about cost savings, especially to the energy- and raw materials-intensive sectors. However, with sticky nominal wages, we believe that persistent deflation will cause real wages to rise, profit margins to fall and employment to be cut back, which may set off a deflationary cycle with far more serious consequences. A deflationary environment generally favors bond holders (or creditors) over equity investors (or debtors).
The key is to prevent deflationary expectations from getting entrenched. We expect further aggressive policy responses in the coming months. Specifically, we forecast at least a 108bp cut in the benchmark interest rate by mid-2009 (see China Economics: 108bps Rate Cut and More to Come, November 26, 2008). An additional fiscal stimulus package is also a distinct possibility. While we expect a broadly stable USD/CNY exchange rate throughout 2009, we could not rule out renminbi devaluation were a severe deflation (e.g., more than -2.0%) to persist (see China Economics: A New Renminbi Regime? November 24, 2008).
Snap Shot of the Major US Market Indices
DJIA: The Blue Chip are the laggards because of the financials. The DJIA went South on this action but it is above the late December intraday low at 8364. Looking for the DJIA to hit, hold and turn at 8500 or so in here.
Stats: -143.28 points (-1.64%) close 8599.18
VOLUME: 204MM/shrs Friday vs. 226MM/shrs on Thursday. Volume lite.
S&P 500: The S&P500 was effected by sell off of the financials, it closed at the 50 day SMA, the level it must hold and make a higher low to continue the move North off the November low. S&P 500 tagged the November/December up trendline on last Friday’s close, and holding a key level at the 50 day MA.
Stats: -19.38 points (-2.13%) close 890.35
NYSE Volume: 1.159B (-3.17%). Volume was below average all week.
NAS: The NAS could not hold the bounce on the open and gave up the 50 day EMA (1609), and sold m lower to the 18 day EMA, putting it just below the December highs. This keeps NAS in the range of support for it to make another higher low and resume the move North.
Stats: -45.42 points (-2.81%) close 1571.59
Volume: 1.95B (-2.35%). Volume; below average as on last Thursday
Stay tuned…
The Charts*
DJIA Chart: http://stockcharts.com/h-sc/ui?s=djia
The S&P 500 Chart: http://stockcharts.com/h-sc/ui?s=sp500
The NAS Charts: http://stockcharts.com/h-sc/ui?s=NAS
Stock Chart School: http://stockcharts.com/school/doku.php?id=chart_school
Stock Charts Glossary: http://stockcharts.com/school/doku.php?id=chart_school:glossary_s
*Charts from www.Stockcharts.com
MARKET SENTIMENT
The Sentiment Indicators: These indicators are psychological indicators that attempt to measure the degree of bullishness or bearishness in a market. These are contrary indicators and are used in much the same fashion as overbought or oversold oscillators. Their greatest value is when they reach upper or lower extremes.
1. VIX: 42.82; +0.26
2. VXN: 43.84; +0.61
3. VXO: 42.6; +0.64
4. Put/Call Ratio (CBOE): 1.03; -0.04. 3rd session above 1.0 on the close last Friday.
Note: Watch the VIX, it will tell us when we are moving back to a more rational market.
*The Market Volatility Index (VIX) measures the volatility of the market. A recent news story described it as “the options market’s gauge of investor fear.” Traders use VIX as a general inverse indicator of market volatility and sentiment. High numbers mean that there’s excess bearishness, and low numbers indicate excess bullishness. The VIX is updated intraday by the Chicago Board Options Exchange (CBOE), using Standard & Poor’s 500 Index (SPX) bid/ask quotes. It was created in 1993.
**The CBOE NAS Volatility Index (VXN) employs the same formula used to calculate $VIX, which is based on the implied volatility of S&P 500 index options. This formula is derived from a basket of put and call options. Some are out of the money, some in the money, and some at the money. The resulting $VXN represents the implied volatility of a hypothetical 30-day option that is at the money.
***The VXO is the ticker created to track the “original VIX” that was calculated using the prices of S&P 100 options. The new VIX uses the ticker $VIX and is calculated using the prices of S&P 500 options. The fundamental nature of the VXO is the same as the VIX, but it is less robust and not as simple as the VIX.
Bulls vs. Bears:
Bulls: the Bulls are at 41.8% and continue their charge North up from 38.5% last week and up from 25.3% in December. They are now above the 35% threshold below which is considered bullish. It does not mean the action is now bearish. That level is up at 55%. The Bull bottomed on this leg lower at 21.3% in November 2008. This last leg down is the largest week South move we have ever seen, down from33.7% to 25.3%.
For your reference: The Bulls bottomed in the summer of 2006, the last major round of selling ahead of this 2007 high, near 36%; 35% is considered Bullish.
Bears: the Bears closed last week at 34.1% down from 38.5% the week earlier and off of 46.2% hit in December. They are below 35% the level considered Bullish for stocks, but as with Bulls, they are South of the level considered bearish for stocks. Bearishness hit a 5 year high at 54.4% the last week of October.
For your reference: This move over 50 takes it to the highest point since 1995 and is negative in the extreme. Again, 35% is the level that historically indicates excessive pessimism.
What to expect this week, and down the line…
There is a lot going on this week not the least of which is the kick off week off today of the annual ththree day JP Morgan Annual Healthcare Conference in San Francisco. My pals will be there showcasing AMDL, Ltd. (ADL on the AMEX).
Even though the markets are looking lame and nervous I am looking for Northside opportunities if the technical, and the leaders sectors rebound with off their Southside tests. Sure it looks uncomfortable, but remember that the market rises on that porverbial Wall of Worry that I mentioned above.
Investors are nervous as they see the 6th consecutive month of declining earnings and the S&P forecasts is for another 14% drop.
I do not think that they have to worry about the US Congress adopting the Obama Stimulus Package, Oh sure there will be some political rhetoric and debate but in the end those people will authorize the spending, do they have a real choice? I think not…
Again, this is January so, although we would like to see the market higher, it may not give it to us, and then again it may, so we will take what the market gives.
Stay tuned…
Chartists plot your points
(Resistance/Support on the DJIA, S&P 500 & the NAS)
DJIA: Close 8599.18
Resistance:
8626 December 2002
8667 50 day SMA
8743 10 day EMA
8829 late November 2008 high
8854 50 day EMA
8934 December 2008 closing high
8985 closing low in the mid-2003 consolidation
9200 July high in the 2003 consolidation
9323 June 2003 high
9353 90 day SMA
9575 September 2003
9654 November 2008 high
Support:
8521 interim high in March 2003
8451 early October 2008 closing low. Key.
8141 early December 2008 low
8197 2nd October 2008 low
8175 October 2008 closing low. Key.
7965 November 2008 intraday low.
7882 October 2008 low. Key.
7702 July 2002 low
7524 March 2002 low
7449 November 2008 low
7282 is the October 2002 low
S&P 500: Close 890.35
Resistance:
896 November 2008 high
897 18 day EMA
899 early October closing low
903 10 day EMA
916 50 day EMA
919 early December high
965 2003 consolidation low
979 90 day SMA
995 June 2003 consolidation high
1008 November 2008 High
Support:
889 interim 2002 high
866 2nd October 2008 low
853 July 2002 low
848 October 2008 closing low
839 early October 2008 low
815 early December 2008 low
818 November 2008 low
800 March 2003 post bottom low
768 2002 Bear Market low
741 November 2008 low
NAS: Close 1571.59
Resistance:
1574 18 day EMA
1603 December high
1609 50 day EMA
1620 early 2001 low
1737 90 day SMA
1644 August 2003
1782 August 2004
1786 November 2008 high. Key.
1948 early October 2008 gap open down
Support:
1565 2nd low October 2008
1554 50 day SMA
1542 early October 2008 low
1536 late November 2008 high
1521 late 2002 high off of the Bear Market low
1499 2008 closing low
1493 October 2008 low. Key.
1428 November 2008 low
1398 early December 2008 low
1387 2001 low
1295 November 2008 low
John Mauldin is back with his keen insight on what to look for in 2009 (see the attached pdf file for the whole story)
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