The Sabrient Blog

Bulls put up a valiant offensive in the last 20 minutes of trading on Tuesday to push the Dow Jones Industrial Average (DJX) back above the 10,000 level as the month of August came to a close. For the last six days of August, bears either succeeded or gamely tried to penetrate this psychologically important level intraday only to be repelled by the bulls. And then of course today (Wednesday) the market gapped up strongly and stayed strong all day.

In this low-volume trading environment, the bulls have been able to hold support, and today saw a combination of speculating, bottom-fishing, and short-covering such that almost every component of the S&P 500 finished positive on the day. When volume returns over the next week or so, it will be harder to defend. Plus, the technical picture is still not pretty in my eyes.

The bear flag that I described in my blog post on Sunday night (“Where to Next? Technical Analysis of the SPY Chart” http://www.sabrient.com/blog/?p=2048) was confirmed on Monday when the support line gave way. Yesterday, about the only positive aspect in the charts was the possibility of double-bottom support for the major indices, e.g., SPY (105), DIA (100), QQQQ (43), and IWM (59), and that was what happened, with each index now attempting to overtake its 50-day moving average once again. The SPY is now back up to the resistance line of that bear flag pattern. Read more…

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As I pointed out back in June, cash on hand among S&P 500 companies has been at record levels, and up 25% over the same time last year. One would presume that such cash levels would eventually be used for share buybacks, M&A, or dividend increases – all of which would impact the market favorably.

Well, there are signs that the purse strings are loosening up. Last week, BHP Billiton (BHP) made a bid for Potash (POT). Then, Intel (INTC) moved on McAfee (MFE), and this week Hewlett-Packard (HPQ) is bidding against Dell (DELL) for data storage firm 3PAR (PAR). Now there’s speculation about potential deals in the oil & gas sector, given the huge capital requirement for exploration & production in remote areas.

When the BHP/POT announcement came out last Tuesday, the market took it as a sign of impending M&A mania and a reason to soar, but the excitement only lasted one more day before the selling set in.

Bears got more aggressive today after the release of existing home sales for July. Sales dropped -27% month-over-month to an annualized rate of 3.8 million units – far below expectations of 4.7 million units and the worst since records began in 1999. Housing supply is now 12.5 months. I think the constant talk about a double dip in housing is becoming a self-fulfilling prophesy as lenders and buyers alike listen to the news and become afraid to either lend or buy. Anecdotally, I’m hearing that some institutions are calling in small business loans that are collateralized by real estate, in an effort to reduce their exposure. Read more…

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The market found pleasure in manure today. When Australian miner BHP Billiton (BHP) proposed to acquire Canadian fertilizer maker Potash (POT), the market saw this as an opportunity to soar. Perhaps traders took it as a sign that corporate cash is ready to be deployed…or perhaps it was simply a low-volume oversold bounce on the flimsiest of catalysts.

In any case, low-volume trading can make for volatile markets. The S&P 500 spent the first seven days of August above its 50- and 200-day simple moving averages, seemingly on the start of a new uptrend. Then during two days of selloff, it plummeted below both moving averages, where it stayed for three full trading days. The start of a new downtrend? Don’t blink, because with today’s rally, it is back above its 50-DMA.

We’ll see what Wednesday brings, but this constant reversing from uptrend to downtrend is tough on swing trading or investing. Only the daytraders are thriving. Read more…

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The SPY sold off early today in advance of the FOMC decision, but bounced strongly from the support line of the bearish rising wedge formation, which also is quite close to its 200-day moving average. Just as I said last week, all market indexes appear a bit extended and ready to pullback, but the bulls are game. Put/call ratio and volume is low. In fact, Monday saw extraordinarily low volume for a full (non-abbreviated) trading day.

Overall, the market’s resiliency remains intact, and all major indexes remain above their important 50-day and 200-day moving average. Although many technical indicators appear to be rolling over, that hasn’t phased this market lately.

Market volatility represented by the VIX spiked about 10% early in today’s session and then settled back down near the lows of the day – as it has tended to do often since peaking around 28 in mid-July. It closed today at 22.37, which along with the low put/call ratio certainly doesn’t reflect much fear among traders. Keep in mind that the VIX tends to move opposite the market, so finding a support level (like it seems to be doing lately in the 22 range) is typically bearish for the market – although it’s not an indicator that you can time the market on.

Sabrient’s SectorCast-ETF model employs a fundamentals-based multi-factor approach including forward valuation, earnings growth prospects, recent analyst consensus sentiment, and various return ratios. Other than the high ranking for Tech, current quant rankings are starting to reflect a more neutral stance among analysts. Read more…

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The SPY finished the month of July up a robust +7%, and then started the first day of August by tacking on another +2% gain. All market indexes appeared a bit stretched from the mean and ready to pullback today, but the bulls fought on mightily to keep the day’s loss minor. Market resiliency remains intact, and all major indexes held above their important 50-day and 200-day moving averages.

As I said last week, after trending strongly off its March V-bottom last year, this year’s market has not made itself very easy to figure out, so I wouldn’t back up the truck quite yet on bullish positions.

Enhancements to the Model:  Sabrient’s quantitative SectorCast-ETF model employs a fundamentals-based multi-factor approach including forward valuation, earnings growth prospects, recent analyst consensus sentiment, and various return ratios. We are constantly testing, refining, and enhancing our models, and last week we introduced major changes to the SectorCast model. Read more…

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The market continues to look strong and resilient. Whether the news, economic reports, and earnings announcements are bad or good, the market has been absorbing the blows or chasing the momentum like a champion. Now it is struggling with various resistance levels from moving averages and chart formations, but continuing to hold up in this low-trading-volume environment.

Although I have been looking for more downside action to test support, the market’s resiliency has been impressive. All major averages are now back above both their 50-day and 200-day simple moving averages – and well above their exponential moving averages – which would suggest a new uptrend is firmly established. But this market has not made it quite so easy to figure out this year, so I wouldn’t back up the truck quite yet.

Enhancements to the Model: At Sabrient, we are constantly testing, refining, and enhancing our quantitative models, and I’m pleased to say that we have introduced major changes to our SectorCast model. The newly enhanced version will be used by Sector Detector starting today. The biggest change is a reduction in the importance of projected price-to-earnings ratio (PPE), plus differences in the way our proprietary relevance scoring approach is implemented for the given factors and the way the composite scores are compiled. Read more…

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It is surely understandable if an investor is afraid to participate in this choppy stock market. Bounces from support are met with selloffs from resistance. In 2008, we got a strong downtrend, and in 2009, we got a strong uptrend, but this year has been difficult to gauge. Yesterday, IBM had a poor earnings report and the market tanked badly in the afterhours and opened quite weak this morning, but then recovered strongly to close at the highs. Apple just gave a great report, and the market is up afterhours. What’s an investor to think for tomorrow?

Although I’ve been looking for more downside, the market’s resiliency has been impressive. Weak housing starts were reported, but then sectors like housing and building materials outperformed, going against the grain of Sabrient’s quality ratings. Our fundamentals-based Company Outook rank has been serving us well this year in this uncertain market, doing a great job of identifying the highest quality stocks to go long and the lowest quality stocks to go short. But today was a crazy day, for sure, as the lowest ranked stocks strongly outperformed the highest. That doesn’t happen often.

Despite market resiliency, the 50/200 moving average crossover (i.e., the “death cross”) is still intact for the large caps, while the mids and smalls are sitting below both their 50 and 200. Today, the indexes are testing resistance from their 20-day moving averages. Read more…

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Amazingly, the market has given us four major trend changes in the past month alone, which apparently hasn’t happened with such frequency in over 10 years. Last week, the market was staring into the proverbial abyss as the S&P 500 incurred the dreaded “death cross,” in which the 50-day moving average of price crossed down through the longer-term 200-day moving average. But alas, rather than fold its tent, the market decided instead to use that event, and its retest of the 2010 lows, as a springboard to a nearly 9% gain (and counting). Afterhours trading today is quite positive after a good report from Intel, which is up a hefty 7% afterhours.

Nevertheless, the 50/200 crossover is still intact for the large caps, so this might be only a short-covering reflex rally that will soon run out of steam as it hits tough resistance levels.

Sabrient’s SectorCast-ETF rankings continue to display remarkable stability. Back in January, after the market had become a bit frothy with speculative optimism in the wake of the bull run off the March 2009 V-bottom, the SectorCast-ETF model took a decidedly conservative turn, with defensive sectors Healthcare, Consumer Staples, and Utilities at the top and Financials, Industrials, and Materials at the bottom. But that has not been the case lately, despite the likes of 50/200 crossovers and other ominous signs of impending doom.
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Last week, the S&P 500 came perilously close to the dreaded 50-day moving average cross down through the 200-day moving average. This is usually considered by technicians to be an extremely bearish development. The S&P 500 came closer last week than the other major indexes, and actually set new lows for the year. Today, the “death cross” happened for the S&P 500, but not for the other major averages.

Moreover, all major market indexes have fallen beneath or are challenging their 2010 lows from February, May, and June. If the market is going to gather support and mount some sort of effort to climb out of this situation, it’s going to have to get started soon or risk a much larger decline that could carry the S&P 500 down to 950.

Nevertheless, Sabrient’s SectorCast-ETF rankings are showing remarkable stability. Back in January, after the market had become a bit frothy with optimistic speculation after the bull run off the March 2009 V-bottom, the SectorCast-ETF model took a decidedly conservative turn, with defensive sectors Healthcare, Consumer Staples, and Utilities at the top and Financials, Industrials, and Materials at the bottom.

But this time, despite the immense doom & gloom we hear in the news, the model is indicating that Wall Street analysts are still showing optimism about earnings improvements in some of the more economically sensitive sectors, and it is telling us that forward valuations are still quite reasonable – especially in the wake of this sharp recent correction. Read more…

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Sabrient’s SectorCast-ETF rankings are holding mostly steady; however, the continued fall in Consumer Discretionary against the other sector ETFs has suggested near-term weakness ahead for the markets – which has definitely played out since the minor top on June 21. Last week, the S&P 500 lost important technical support levels that it had fought so hard to reclaim, and then today it all came crashing down pretty hard – with perhaps more carnage to come.

The market has been searching for direction, and today it might have found it. Last week, strong opens led to weak closes, and the important 200-day moving averages for all major indexes gave way. Now, all indexes are challenging the 2010 lows from February, May, and June. Today’s weakness might have sealed the deal for the near-term market direction, unless bulls can put together some kind of bounce tomorrow (other than the “dead cat” variety).

Nevertheless, analysts are still showing optimism about earnings improvements, and forward valuations are still reasonable. And, as I mentioned last week, cash on hand among the S&P 500 companies is now at record levels. Once that gets put to work through share buybacks, M&A, or dividend increases, which could happen once the weak holders exhaust their short-term selling, we should see some strength return – and get an added boost from short-covering. Read more…

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