The Sabrient Blog

Nothing seems to be strong enough to lift the market out of its doldrums.  Not the shiny corporate earnings announcements from Wal-Mart (WMT) and Home Depot (HD).  Not the exciting merger talks between BHP Billiton (BHP) & Potash (POT) or between Intel (INTC) & McAfee (MFE). Not the slightly improved global economic picture. The market continues to focus on the troublesome domestic economy, which last week produced some paltry numbers and some truly miserable ones.

The week started with weak signals from the Empire State Manufacturing Index and ended with initial jobless claims hitting 500,000 on Thursday for first time in nine months and the Philly Fed’s atrocious turnabout from a positive +7.5 to a negative -7.7.

The bottom line is, despite better-than-expected earnings and optimistic guidance from the corporate corner, the market is stuck on the gloomy economic picture, which includes the worrisome fact that banks simply aren’t lending to small businesses or anyone else.

What will it take to get the market unstuck and moving forward again?  Tangible evidence that we’re not headed into a follow-up recession. Read more…

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As we wind down the summer doldrums, are we heading toward another low-volume August?  Today was one of the lowest volume sessions of the year on the NYSE. Kids are returning to school in some parts of the country already, and many portfolio managers and traders will begin returning to their desks. But what they are finding in the market this week is quite different than they would have seen last week.

At this time last week, the market was creeping on an upward trajectory on low volume, and the S&P 500 was above its 50- and 200-day moving averages. But I cautioned that it was too early to declare that the bulls were home free and that the market seemed to be in a wait-and-see attitude from Bernanke and the FOMC.

Here is how it unfolded.  After the usual volatility before and after the FOMC report on Tuesday, traders seemed to be celebrating the Fed’s announcement. But Wednesday launched a precipitous decline that briefly found support at the 50-day MA (for at least the S&P 500 and Nasdaq 100), but then sold off further on Thursday. It was exacerbated by disappointing data from China and Japan, and a somber outlook for Europe. Some of the retailers gave disappointing outlooks, and there was a flight to safety as treasuries and gold firmed up and the dollar put in a weekly gain of 3.1%. On Friday the market finished down nearly 4% on the week. Read more…

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It is always important when analyzing data to consider the relevance and importance of such numbers. So, before looking at the numbers from the lastest ISM reports, let us look at what Briefing.com states about the ISM manufacturing reports at Economic Releases: ISM Index. Under the title “Big Picture” it states the following:

This is a highly overrated index. It is merely a survey of purchasing managers. It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse. It does not weight for size of the firm, or for the degree of better/worse. It can therefore underestimate conditions if there is a great deal of strength in a few firms. The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle. It must be recognized that the index is not hard data of any kind, but simply a survey that provides broad indications of trends.

Obviously any report can be overrated if interpreted in the wrong way. One way this report seems to be over used and misinterpreted is by relative changes in the index instead of considering the “breakevens” in practice. For example if the headline ISM index drops by 6 points it is significantly more important if it drops from above 50 to below 50 than if the index drops from the 60s to 50s range. The first signifying a reversal of growth and the second a slowing of the growth rate which might actually be good. That is, instead of an overheated economy with growing number of bottlenecks it may signify a stable growth trajectory.
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Our thundering herd of baby bulls struggled mightily last week to stay clear of that gloomy channel, and at one time the S&P 500 threatened to cross back under its 50-day moving average, but it ended the week about where it started.

The slipping and sliding were caused primarily by mixed news.  Last week started off strong with new home sales coming in well above expectations, but consumer confidence and durable goods both missed their marks.  To cap off the disappointing numbers, GDP came in on Friday at 2.4%, which was weaker than expected.  Although it was only 0.1% below expectations, the bulk of that small growth seemed to be in inventory buildups and government spending.

Things turned on Friday, however, with the Chicago PMI coming in better than expected.  That, combined with positive news over the weekend from European banks and today’s construction spending report beating expectations (+0.1% versus a negative -0.8%), powered the bulls. Today the S&P 500 closed at 1125.86 (+2.2%), climbing well above its 200-day MA.  Its new upward channel is now well formed. Read more…

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The abundance of news last week — most with a positive slant — finally boosted the S&P 500 out of the Channel of Gloom in which it was mired for so long. Not only did the S&P 500 break out of the channel, but it is now threatening the 200-day moving average, having surpassed the 50-day MA last week.

Apple (AAPL), Morgan Stanley (MS), and Ford (F) powered the corporate side with excellent earnings reports, while today’s positive news from FedEx (FDX) and the housing industry — new home sales were up 23.6% in June — lifted the gloom from the economic side. To be sure, there were a few corporate disappointments last week — IBM’s (IBM) revenues, Amazon’s (AMZN) earnings, Google (GOOG) — but on the economic side, most of the reports were at least tolerable.

All this positive news rapidly shifted the market from its flight to safety to chasing the bulls. The baby bulls led the charge, with all small-caps turning in a +6.5% or better performance. Among the small caps, small-cap growth was the best (+6.7%). The worst cap/style was large-cap value, up +3.3%, which is still pretty good. Read more…

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Tipping Point Deja Vu

by David Brown, Chief Market Strategist, Sabrient Systems

Seems like we were here just last week, waiting for the market break out of its “Channel of Gloom” or tip further into the Channel’s murky depths.  In fact, we came close to tipping to the positive side last week but were held down by a poor consumer sentiment report on Friday and negative earnings from Google (GOOG), plus a double negative whammy from Bank of America (BAC).  Not only did BAC announce negative revenues, it let loose with a scary warning about the negative impact of write-offs from the new financial regulations. So on Friday, the S&P 500 tipped further into the three-month Channel of Gloom.

Today  the market drifted near the unchanged mark most of the day, but S&P 500 managed to close up +0.6%, well below the top of the Channel and still submerged below its 50-day and 200-day moving averages.  In the after-market, following IBM’s disappointing revenues report, the market gave it all back, and then some.

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One hesitates to put too much emphasis on any given week when discussing market trends, but this week could be the tipping point for the current market. Despite the S&P 500’s 50-point gain last week on virtually no news at all, the fact remains that it is still more than 12% below the April 23rd high of 1217 and still has not broken out of the downward channel that began on April 26.

The bottom of the channel was reached about two weeks ago at 1010, and the top is now about 1080, as you can see from the chart below. Coincidentally, the top is close to where the 50-day and 200-day moving averages currently reside.

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I hope you enjoyed the Fourth of July fireworks on Sunday, because there might not be much to celebrate on Wall Street this week.

Last week we warned that if most of the impending economic releases were negative, the market would likely fall worse than it did the week before.  And that’s what happened.  In fact, it dropped approximately twice as much as the week before. (It doesn’t feel so good to be right.)

Interestingly, the numbers weren’t all that bad, just somewhat lower than expected. In fact, there was a better-than-expected unemployment figure on Friday (9.5 versus the expected 9.6), but that was offset by the employment number (nonfarm payrolls) which fell -125,000.

The market’s 15% drop since late April seems to have turned Wall Street into a bargain basement. This morning, bargain hunters gave the market a nice pop, with the S&P 500 reaching an intraday high of 1042 (+2.0%), but it closed the day almost flat, up only +0.5%.

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We began the month of June with the S&P 500 at 1089. Today, it closed at 1074, leaving just two more days to gain the lost ground and turn the month positive.  The Summer Solstice on June 21 marked the high point for the month, with an intraday high of 1131 and its sights set on the 50-day moving average above. What a difference a week makes.

The decline since then can be attributed to some really bad economic reports.  The worst news last week was the horrid new home sales figures, which came in at a 47-year historical low.  Durable goods fell more than expected. GDP for Q1 was revised downward, although it was still over 2%. Consumer sentiment was the only news of the week that was even a tad positive.  Nor did much happen to improve the global gloom. The oil spill is still flowing with hurricane season upon us, and European debt received additional ratings downgrades.

The current week offers a plethora of important economic releases, which is a little scary after last week’s carnage.  Today we saw the personal income report come in a little less than expected at 0.4%. The more important consumer confidence figure will be released Tuesday, followed by the Chicago Purchasing Manager Index on Wednesday.  On Thursday we’ll get the weekly initial jobless claims, along with ISM and pending home sales, but the blockbuster will come on Friday when the quarterly unemployment figure is released, along with auto sales and factory orders. Read more…

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Last week was a good week for the market from a technical standpoint, with the S&P 500 moving ahead about 2% and pushing through two important layers of resistance.  It broke above its 200-day moving average, which had been providing stiff resistance for weeks, and also broke through even stronger resistance at the 1114 level. This morning’s news that China intends to let its currency float with market demand buoyed the market at the opening, but alas, that surge didn’t even last the day.   After gapping up 10 points at today’s open to eclipse its 100-day moving average, the S&P 500 plunged back down to find tentative support at its 200-day MA, and closed at 1113.

It appears that the news about the China yuan being allowed to float more freely wasn’t good enough to counter our own economic woes.  May’s industrial production numbers reported last Wednesday were fairly good (1.2% versus the expected 1.0%), but the housing news for May, which also came in on Wednesday, was bad (0.593M starts vs. the expected 0.650M) and last week’s initial jobless claims were alarming (472K vs. the expected 450K).

In the mixed week that the market had (up 3 days, down 2), the cap/style stats looked all about the same, with Small-cap Value (+2.84%) coming in just a hair over the biggest laggard, Large-cap Value (+2.21%). Read more…

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