Faltering Financials Forecast Continuing Failure for Stocks 15 comments
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The market has rebounded dramatically from extremely oversold levels in November, with Tuesday's peak of the S&P 500 representing a stunning 27% recovery from the 11/21 intraday lows. This type of action is typical for bear markets and could even continue. Perhaps the S&P 500 could next test its November peak of 1007 or even higher, yet this could still be a bear market.
I have noticed several things lately that suggest that the overall dynamics aren't as positive as the bounce may suggest. First, the recent negative reactions to bad news from Intel (INTC) and Walmart (WMT) suggest that the market is no longer willing to march up despite continued fundamental deterioration.
Second, the lack of leadership in the market seems to dictate that there is no new bull market. Only 5 names in the S&P 500 (1%) are within 10% of their 52-week highs. If I relax it to 15%, 13 names make the cut (<3%). Looking at the broader Russell 3000, it is only slightly more encouraging, suggesting that some smaller companies have something going for them that larger ones don't, with 151 names making the cut (5%). 80 of those stocks are within 10% of their 52-week highs. Some overall characteristics:
- $620mm median market cap
- All sectors but Energy represented
- 17.6 median PE
- Very low levels of net debt to capital (5% median)
- 2009 EPS estimates flat to rising
The final reason is the most concerning to me, and that is a stark divergence between the rest of the market and the Financials sector. It would seem that the area that is clearly at the root of the problem would need to instill some investor confidence before we can begin a new bull market. The S&P 500, as you can see below (click on chart to enlarge) as represented by the SPDR ETF (SPY), took out December highs, though on low volume and quickly moving back into the consolidation:
I can't conclude much about the future direction of the market based upon the recent failure of SPY. Most of the 9 Sector ETFs except for Financials shows a similar pattern of exceeding the December highs and clearing the 50dma. Materials (XLB) and Staples (XLP) exceeded their respective 50dma but XLP only matched and XLB just missed the December peaks. Financials paint a totally different picture (click on chart to enlarge):
Note that XLF not only failed to achieve its prior peak and remains in a different type of pattern (the bottom of the triangle is flat, not ascending while the top is descending and not flat), but that the 50dma has served as resistance since the lows. In fact, XLF trades at less than 1/2 of its value in late September when it first broke the 50dma yet it can't get a bounce high enough to reattain it. The bottom panel shows that despite the recovery from its depths in November, XLF seems to be continuing the trend of underperforming the broader market that began in mid-September after a two-month "summer vacation" from the trend that has actually been in place since early 2007:
Call me a skeptic, but all the efforts of Bernanke, Paulson and Congress don't seem to be convincing investors that our financial system is on the right track yet. Until then, it would appear that stocks will struggle at best.
Disclosure: None
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This article has 15 comments:
Watch the bonds and preferreds in financials the TARP is invested in
A noice panic in the market could present another opportunity to pick some up
The stocks are black boxes and merely trading vehicles. The financials are still hiding an army of skeletons in the closet. But invest alongside Uncle Sam.
What do you expect, first the government becomes the lender of last resort and now wants to be the spender of last resort. What can we expect in the future, the robber of final resort. Were do you think they get their money if they don't falsify their financial like Maddoff (they do it with social security in tapping all the deposits and never paying it back, in Iraq borrowing rather than declaring it as spending, and the fed lending rather than recognizing losses tied to their guarantees. There is no such thing as market to market with the government. More like mark to whatever you want and pray.
Anyway, there is nothing we can do. Everyone is government charge card happy now that $1 trillion seems like nothing.
Indeed. Got this one right Alan!
.... I'll throw in that apparently the investing public has completed its honeymoon with Obama as well... I'd expected a more sincere continuance of the run-up till his inauguration. That impetus seems to have died off. Anyone have any financial Viagra?
jegan
The question is will the stimulus be large enough to 1) stem further losses in jobs, and 2) be sufficient to create more new jobs than lost jobs? Where is the market going? I think we will see some individual stock winners based on stimulus package spending, but in order to see broad upward market movements, we need to see more jobs created then are being lost.
Let me amplify and agree with this comment. I had expected the January effect to take us through the inauguration.
The "Obama effect" is one of: Risk economy in the tank, resulting in job losses and low investment outlook. The market is not looking at outgoing Paulson as a factor anymore, they are looking at the Obama/Dems' govt spending boondoggle, mis-named a 'stimulus' and they are realizing it wont do a danged thing to help the private sector economy.
But I also dont think 'bear rally is over' is the right take. you wont know except in retrospect. I'd look to the credit spreads to see where we are at with a floor in the market. The market, despite the risks from Democrats' mis-managing a weak economy, is likely undervalued and likely will be up 15-20% in 2009. JMHO.
Not saying it will last but there will be lots of msm coverage and hype
with a new prez...could rally into March or April...
kinda thinking we go back over 10,000 dow and then another big sell off
towards 6000.....if we only knew...thinking the bear market is hear to
stay for next few years...
this is a humpty dumpty economy. the entire rally has been built on the back of short covering and fear of missing "the bottom." the problems we have are not of short term duration. the fact that banks...including thought-to-be strong banks immune from bad real estate lending...are pushing to new lows is a tell.
i think we're seen the near term top.
On Jan 10 08:00 PM scotty1560 wrote:
> could easily see an Obama rally once he takes office.
>
> Not saying it will last but there will be lots of msm coverage and
> hype
> with a new prez...could rally into March or April...
>
> kinda thinking we go back over 10,000 dow and then another big sell
> off
> towards 6000.....if we only knew...thinking the bear market is hear
> to
> stay for next few years...
I was trying to draw the distinction between the behavior of the rest of the market, which looked positive in many regards, and the continuing downward trend in Financials. I appreciate the comment by User 295408 above, as he or she is correct that perhaps I could have made the case even stronger by looking at the narrower bank sub-set of Financials. The recent formation is very similar, perhaps now slightly more negative after Friday (I published my article on my blog before the payroll report). Interestingly, BKX, an index of banks, has recently eclispsed its November lows in terms of relative strength to the broad market yet remains well above the levels from July.
On Jan 10 03:38 PM Bob Lunn wrote:
> Improvement in financials is probably a good gauge of improvement,
> but the causal factor that will drive improvement is jobs. The economy
> is bleeding jobs. People can't buy without jobs. With everyone wondering
> if their job is next to go, they hunker down and don't spend. People
> are not going to be buying things until they trust that their jobs
> are gong to be there tomorrow. Getting the economy going again is
> about creating jobs to replace lost jobs. Jobs are the fundamental
> metric. If you want to predict where the market is going, look at
> the jobs situation.
>
> The question is will the stimulus be large enough to 1) stem further
> losses in jobs, and 2) be sufficient to create more new jobs than
> lost jobs? Where is the market going? I think we will see some individual
> stock winners based on stimulus package spending, but in order to
> see broad upward market movements, we need to see more jobs created
> then are being lost.
www.savelongisland.org...
I think you made a very balanced case for caution, although, if I am reading between the lines correctly, you have your fingers crossed for a further rally.
One important feature on your SPY chart is the divergence between price action (up) and volume (trending down) since November 20. That could be a negative sign of investor sentiment not holding up to support a further rally. If last week's weakness continues this week and there is any significant rise in volume, the rally from Nov. 20 is probably over and we will start watching and waiting for another bottom to trade.
Bob Lunn wrote: "The question is will the stimulus be large enough to 1) stem further losses in jobs,..." and you replied "For true signs of a recovery, jobs will be a lagging indicator, as they have always been. Stocks are a leader,...".
You both are making correct assessments. Stocks rallies do often lead a recession bottom by 3-6 months. (However, there can be false rallies before the final "indicator" rally.) And some employment indicators are coincident and lagging. But, the weekly new unemployment claims is a leading indicator and that is what is flashing a big red signal the past three months. Bob Lunn is correct in citing the stemming of job losses as an important early objective for getting this recession closer to a bottom.
Below is a summary of the various employment factors included in the various economic indicators. This is copied from a previous comment I posted several weeks ago.
Employment is a lagging indicator, a coincident indicator and a leading indicator, depending on the statistic examined.
There are two labor statistics in the Index of Leading Economic indicators:
1. Average weekly hours of production workers (manufacturing)
2. Average weekly initial claims for unemployment insurance (inverted)
There are two labor statistics in the Index of Coincident Economic Indicators:
1. Employees on nonagricultural payrolls
2. Personal income minus transfer payments
There are three labor related statistics in the Index of Lagging Economic Indicators:
1. Average duration of unemployment (inverted)
2. Change in index of labor cost per unit of output
3. Ratio of consumer installment credit outstanding to personal income
These indexes are maintained by the U.S. Department of Commerce:
www.bea.gov/
While obviously containing job loss is ultimately critical for the economic recovery and limiting the downside, I stand by my comment that employment is a lagging indicator. The economy will head up while employment is still falling. This makes a lot of sense actually. Now, there may be an inflection point, and you are right that a change in the rate of lay-offs can be predictive, but the number of people working lags.
Look back at the data. Employment growth may slow as the economy decelerates, but it rarely goes negative until after economic activity has peaked, with the converse true as well. Spending will precede hiring on the way back up. Stocks will precede spending. Watch out for the fake indicators!
On Jan 11 12:17 AM John Lounsbury wrote:
> Alan - - -
>
> I think you made a very balanced case for caution, although, if I
> am reading between the lines correctly, you have your fingers crossed
> for a further rally.
>
> One important feature on your SPY chart is the divergence between
> price action (up) and volume (trending down) since November 20. That
> could be a negative sign of investor sentiment not holding up to
> support a further rally. If last week's weakness continues this week
> and there is any significant rise in volume, the rally from Nov.
> 20 is probably over and we will start watching and waiting for another
> bottom to trade.
>
> Bob Lunn wrote: "The question is will the stimulus be large enough
> to 1) stem further losses in jobs,..." and you replied "For true
> signs of a recovery, jobs will be a lagging indicator, as they have
> always been. Stocks are a leader,...".
>
> You both are making correct assessments. Stocks rallies do often
> lead a recession bottom by 3-6 months. (However, there can be false
> rallies before the final "indicator" rally.) And some employment
> indicators are coincident and lagging. But, the weekly new unemployment
> claims is a leading indicator and that is what is flashing a big
> red signal the past three months. Bob Lunn is correct in citing the
> stemming of job losses as an important early objective for getting
> this recession closer to a bottom.
>
> Below is a summary of the various employment factors included in
> the various economic indicators. This is copied from a previous comment
> I posted several weeks ago.
>
> Employment is a lagging indicator, a coincident indicator and a leading
> indicator, depending on the statistic examined.
>
> There are two labor statistics in the Index of Leading Economic indicators:
>
> 1. Average weekly hours of production workers (manufacturing) <br/>2.
> Average weekly initial claims for unemployment insurance (inverted)
>
>
> There are two labor statistics in the Index of Coincident Economic
> Indicators:
> 1. Employees on nonagricultural payrolls
> 2. Personal income minus transfer payments
>
> There are three labor related statistics in the Index of Lagging
> Economic Indicators:
> 1. Average duration of unemployment (inverted)
> 2. Change in index of labor cost per unit of output
> 3. Ratio of consumer installment credit outstanding to personal income
>
>
> These indexes are maintained by the U.S. Department of Commerce:
>
> www.bea.gov/
It's been 4 months and already people have their facts screwed up. What else is new? How long was everyone claiming we weren't in a recession until finally they decided we were in one, and had been in one for 18 months??? For Gods sakes, start thinking for yourself.