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  • S&P Closes Above 200 Day Moving Average; Catching Up on Articles  0 comments
    Jun 2, 2009 9:58 PM | about stocks: SPY

    Originally posted on my blog, Scott's Investments:


    Wow, what a day! The S&P 500 closes above its 200 Day Simple Moving Average (although it closed just below the 200 Day Exponential Moving Average) which is a bullish sign. A close above 945 could mean a retest of resistance at 1000.

    Sitka Pacific Capital Management LLC's monthly client letter has been added to my regular reading list. May 2009's letter (pdf) highlights below:

    The main reason why financial stocks are not a good investment today, despite losses of more than 90% in some cases, is the same reason why technology stocks were generally not a good investment in 2002. The collapse in financial stocks over the past 2 years will take decades to recover from, during which time other areas of the market will produce far better returns. In the long run, it is best to move on from the scene of these crashes and search for more promising opportunities.

    We anticipated the recent rally in the market, but we didn’t anticipate that the market would rally as far as it has in such a poor technical fashion. Since the March low, some sectors have rallied vigorously, while many other sectors—with, arguably, a better fundamental outlook—have risen either modestly or not at all. In previous rallies over the past year and a half, short-covering in sectors such as financials, housing, and consumer discretionary stocks have been accompanied by decent buying in most other sectors—but not this time.

    In fact, as the market continued to rise throughout April, the breadth of the advance continued to weaken. In a new bull market, we would expect to see increasing participation and volume as the market continued to rise. But during this rally, we have seen the opposite....

    Also, at the end of last month the S&P 500 had rallied close to 30%, but 1/2 of that advance was due solely to financials and consumer discretionary stocks. These heavily shorted sectors together only represented roughly 19% of the S&P 500 at the end of March—less that 1/5th of the index.

    When we see the weakest 1/5th of the market responsible for racking up 1/2 the gains during a rally, and the rest of the market fails to increase its participation over time, it is a strong hint that the advance is built on a weak foundation.

    All this doesn’t mean the market cannot rally further. In fact, after the advance in the last few days of the April, it was clear the market was getting ready for another leg up. However, bear market rallies have a way of going on just long enough for the majority of people to forget that we are in a long-term bear market, and it appears it has accomplished that already....

    The rally in our stock market since March has coincided with a number of economic indicators improving from the state they were in earlier this year. There is nothing yet that signals that the economy is starting to emerge from recession and grow, but its clear the economy is now contracting at a slower rate than it was three months ago. This, of course, is a tremendous relief to the markets, and it’s not surprising to see stocks go up and conditions in the credit markets improve.

    However, if we take a step back and consider the larger demographic and consumption trends now in place, we can see why the current rally doesn’t have the strength of a new bull market. That’s because even if stocks have stopped declining for the time being, like the Nikkei was after its low in 1992, a new bull market may still be a very long way off.

    I've also added David Rosenberg's Breakfast with Dave market musings. A highlight from the May 28th letter:

    Let’s not forget what the upcoming round of data releases are going to look like after GM declares bankruptcy — jobless claims are likely going to test the old highs, ISM the old lows, and the boom in consumer confidence is going to seem like a distant memory by Labour Day.


    Well, we have a sneaking suspicion that the nearby peak was May 8 when the yield on the 10-year T-note was 3.29%. That was the tipping point for the stock market, which has only done backing and filling ever since; and some wild swings (three triple-digit up Dow sessions; four triple-digit down days).

    We would have to think that a 4.63% yield compares quite favourably with a 2.6% S&P 500 dividend yield — the spread hasn’t been that wide in at least eight months. Not only that, but the stock market has become increasingly “less cheap” — over the last six months, 2009 consensus earnings estimates have been pared from +30% growth expectations to a mere +9%. The S&P 500 is trading at multiples of around 17-18x, which is no bargain in our view.

    Keep in mind that the S&P 500 and the Dow are back to January 12th levels. At that time, the bond market offered very little in the way of any serious competition as the 10-year T-note yield was sitting at 2.3%. Now the same levels of the stock market are competing with a 3.72% yield.


    That 2.9% MoM rise in existing home sales in April to 4.68 million units (annual rate) was a tad flattering seeing as March was revised down, but this followed a 3.4% decline, which followed a 4.9% February surge which, in turn, followed a 5.3% slide in January. Like the stock market, lots of backing and filling and what we are left with is a flat trend. Maybe that is a good sign that sales are forming a bottom, but wouldn’t one expect a lot more than that considering where mortgage rates are, not to mention the $8,000 tax credit for first-time home buyers.

    Not only that, but distressed sales made up 45% of the sales tally last month, so the underlying pace is actually much softer than the headline suggests. But the only figure that matters for us — from a pricing standpoint — is the inventory number; and the news here was not good — rising to 10.2 months’ supply from 9.6 in March, not to mention the high-water mark of the year. The unsold condo supply is north of 15 months’ supply — this is very deflationary for the sector (prices in this sector have deflated 18.5% YoY and there is surely more to come).

    From Rosenberg's May 29th Letter:


    New home sales in the U.S.A. were practically unchanged in April, edging to 352,000 units at an annual rate from 351,000 in March — bouncing along the bottom despite record affordability and the $8,000 tax credit. It is amazing that despite all the fiscal and monetary stimulus we would have new home sales down 34% from year-ago levels. While the inventory-to-sales ratio has come off its high of 12.4 months’ supply back in January, and 10.6 months in March, to 10.1 months in April, the reality is that home prices will not stop declining until that ratio dips below 8 months’ supply. All the information we ever need to know is in the ‘price’ — the fact that average new home prices fell 1.2% MoM April, down now in four of the last five months, and a record -19% on a YoY basis, is a signpost that there are still more sellers than buyers.

    Page A4 of today’s WSJ runs with California Housing Shows Signs of Nearing Bottom because median home prices rose in back-to-back months (still down 37% YoY, mind you) for the first time in two years; and sales are up 49% from a year ago as well. Problem is that there is so much activity in the forced-foreclosure sales market that it is difficult to make book on the actual underlying trend. But no doubt the inventory backdrop has improved from 9.8 months’ supply a year ago to 4.6 today.

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