Mid-Year Market Roundup

June 30 marked the end of Q2-08 so we thought it a good time to perform our mid-year U.S. market roundup.

In the first chart, we see how the three major indexes have performed together with the MSCI Emerging Market ETF (EEM) and more than 8,300 U.S. stocks in the VectorVest U.S. Composite Index [VVC]. Large caps have been hard hit by high oil prices and the spreading credit crisis with the overall market that includes small and mid-caps faring slightly better than the blue chips and tech stocks of the NASDAQ.

But the first chart only tells the first part of the story.

right click 'view image' to enlarge charts

Figure 1 – A six month daily chart to July 3, 2008 showing the performance of the major indexes since the beginning of 2008. S&P500 – SPX, Dow Jones Industrial Average – DJX, Nasdaq Composite – IXIC, Morgan Stanley Emerging Market ETF – EEM and the 8,369 U.S. stocks in the VectorVest Composite Index – VV Comp.

Chart by www.VectorVest.com

Troubling Tell-Tales

Technical indicators tell a more troubling tale. After hitting lows in late January, stocks enjoyed a rally that lasted till mid-May. Only the Dow Jones Transports Average (not shown here) continued to move higher eventually peaking June 5. However, since then all have been falling hard and, with the exception of the Transports (down 3.9%), are down double digits.

A sign of the impact of the bursting of assets bubbles and the formation recently of a commodity bubble shows up on the chart patterns. As we see in Figure 2, the three major indexes have either put in bearish chart patterns or are close to doing so – in the cases of the Dow Industrials, S&P500 and Nasdaq Composite, they are bearish head & shoulders patterns.

Figure 2 – Four-year weekly chart showing the bearish chart patterns on the major indexes in various stages of forming. Although only the Dow Jones Industrial Average – DJX has broken its neckline (cyan dotted line), the others are heading in that direction with potentially ominous implications for the overall market. It is interesting to note that the broad-based VectorVest Composite (not shown here) of 8,369 U.S. stocks has also broken the neckline of a head & shoulders top pattern but like the Dow, is awaiting confirmation in the way of an upside test of the neckline and subsequent failure.

Chart by www.VectorVest.com

First, the Dow Industrials, in which the neckline was broken in the last week of June, has a minimum projected pattern target on the weekly chart of 9,930. A rally in the coming week or two could invalidate it but that would require a 600 + point move on sizable volume above the neckline at 11,880 being broken and this level holding as support.

As of Thursday’s close, the S&P500 is sitting on the neckline at 1265 while the neckline for the Nasdaq Composite is 2175 (versus the closing price Thursday of 2245.38.) It is interesting to note that the broader NYSE Index of roughly 3000 stocks is also sitting on head & shoulders top neckline support around 8500 and the Russell 2000 Index is closing on its neckline just below 650. The only index not showing a bearish chart pattern near completion is the Dow Transports which would have to drop another 530 points and break support decisively at 4130 to confirm a bearish double top pattern.

Next we take a look at yearly charts of the major sectors to hunt for areas of opportunity and any signs of a turnaround. We are looking for sectors that generally lead in a sustained rally to start moving higher.

Figure 3 – Starting in more or less alphabetical order we see yearly charts of Auto & Truck manufacturers, Building, Business Services, Computer and Electronic sectors showing annual declines ranging from 27% (Business Services) to 39% (Auto & Truck).

Chart by www.VectorVest.com

The five sectors in Figure 3 have been hit hard with Auto & Truck manufacturers taking the worst drubbing, down 39% on the year with Building (residential, commercial & RV etc) next. And as we see all five have turned down strongly in the last few weeks.

Figure 4 shows one group performing well – the Energy sector – up 19% over the last 12 months. However, it has also dropped recently and only time will tell if this is a temporary correction or the beginning of a trend reversal. On the other side of the ledger, we see that Financials have been hardest hit, down 40% followed by Banks (-32%) and Food (-28%) as food retailers have seen profits drop by not passing all the increasing food raw material costs on to consumers.

Figure 4 – Only Energy is up in the last year while Financials have taken the biggest hit.

Chart by www.VectorVest.com

Figure 5 – Next we see that Internet companies have fared better than most sectors but are still down 17% on the year. Leisure products have been hardest hit, down a whopping 46%. 

Chart by www.VectorVest.com

Figure 6 – Mining, the only other sector to show a gain in the last year is up marginally while Office, Real Estate Management, REITs and Retail are suffering.

Chart by www.VectorVest.com

Figure 7 – Last but not least, we see that Steel was up until very recently but took a big hit most likely due to the hefty new steel tariffs put in place on Chinese imported steel products by Congress. Overall Transports are down more than 26% in the last year – a position not accurately indicated by the 20 specially picked stocks of the Dow Jones Transports Average.

Chart by www.VectorVest.com

Most troubling is that there are scant signs of strength in these sectors. With the exception of Energy and Mining, all have lost ground. As well, all have recently turned sharply lower.

Before we can expect any sort of sustained recovery to begin we need to see sectors like technology stocks (Internet, computer, software) and transports to show strong upside moves. Although it is not necessary that these sectors lead, they generally have done so in the past. In the final analysis, any real recovery will depend on consumers which represent 72% of the US economy to begin spending again and that may still be some way off.

Sector	Perform-1Yr
Energy	19.10%
Mining	1.58%
Utility	-9.30%
Software	-16.50%
Internet	-16.70%
Computer	-21.60%
Healthcare	-22.20%
Transportation	-26.30%
Bus Services	-26.80%
Telecomm	-27.10%
Electronic	-27.70%
REIT	-27.90%
Insurance	-28.10%
Food	-28.10%
Building	-30.10%
Bank	-32.10%
Office	-33.60%
Retail	-34.30%
Media	-36.20%
Home	-36.70%
Auto & Truck Man	-37.80%
Financial	-39.60%
Real Estate Man	-40.20%
Leisure	-46.10%

Table 1 – Rank of the major sectors showing annual performance showing that the majority of sectors have dropped more than the 20% necessary to be labeled a bear market.

We outlined our concerns with the proposals put forward by the Democratic contender in our newsletter last month and what impact his policies would have if he were elected.

Here are two charts from Bespoke Investment Group this week. The first shows how important multinationals have been in keeping the stock market and economy from really crashing. In the last eighteen months multinationals have outperformed their domestic counterparts by a wide margin. If Obama gets his way, not only will they be forced to cut profitable overseas operations and relocate much of their activities domestically, they will also pay a higher tax rate for the privilege.

 

Figure 8 – Multinationals with highest international (non-US dollar) revenues compared to domestic company stock performance.

Another reason that the stock market has been challenged lately is that polls show the Democratic contender with a widening lead over the Republican and each time this lead widens, markets have fallen. As we draw closer to Election Day in November and if Obama’s lead widens, there is a potential that markets will react increasingly negatively for one simple reason.

Not since 1930 have protectionist, pro-tax promises been so popular among voters nor has a leading presidential candidate been so anti-business. Mr. Obama rates a 100 rating by the left-think tank Americans for Democratic Action for his voting record. By comparison, 2004 presidential candidate John Kerry scored 96.5 and liberal Ted Kennedy a 95 against a rating of just 16 for John McCain.   

Figure 9 – Chart showing Intrade Obama contract futures value compared to the S&P500. A rising probability of an Obama win has coincided with a declining value on the S&P. 

If Mr. Obama does eventually take the Oval Office there will no doubt be a big celebration. But Wall Street and Main Street investors, corporations, those in the upper income tax brackets and stocks are unlikely to join the party.