Stock Market Update 19-10-09

The Australian market opened in the red and reached a floor for the day in the late morning, before recovering somewhat in the afternoon. The All Ordinaries finished Monday 41 points lower.

The S&P/ASX 200 closed 44 points down. The Consumer Staples sector was buoyed by gains in Woolworths (+$0.77). The Financials sector fell, with selling in Commonwealth Bank (-$0.77), Westpac (-$0.66), National Australia Bank (-$0.70), ANZ (-$0.83), Macquarie Group (-$0.96) and AMP (-$0.20). In the Industrials sector, Toll (+$0.18) gained while Macquarie Airports (-$0.08) and Asciano (-$0.04) went backward. The Materials sector dipped, hurt by BHP Billiton (-$0.12), Orica (-$0.52) and Fortescue (-$0.15); Newcrest (+$0.47) and Lihir (+$0.05) fared better. Other notable losers included Aristocrat (-$0.22) and Santos (-$0.37).

There was little company news on Monday. Oil Search entered a trading halt, regarding the termination of a proposed sale of an effective interest in PDL 2, including a ~3.5% interest in the PNG LNG Project to IPEC, as well as a share placement to institutional investors. Following completion of due diligence, Pacific Equity Partners has offered to acquire 100% of Energy Developments (+$0.10) for $2.65 cash per share. Meanwhile, Energy Developments has terminated discussions with the potential buyer of the UK and French landfill gas power generation assets.

Stock Market Wrap 14-10-09

US stocks weakened on Tuesday after disappointing sales from Johnson & Johnson missed expectations.

Market breadth was negative. On the NYSE, losers beat winners four to three. On the NASDAQ, advancers topped decliners seven to five.

Financial shares were under pressure. Goldman Sachs fell 1.5% on an analyst downgrade. JPMorgan Chase, the Bank of America and Travelers Companies also declined. The Bank of America said it will waive attorney-client privilege and hand over legal documents related to its controversial merger with Merrill Lynch. The company has been under pressure from regulators for months to provide more information on the purchase.

Among notable movers in the financial sector was CIT Group, which tumbled 14% after the lender’s CEO said he would resign by the end of the year.

The NASDAQ stayed in positive territory after Cisco Systems agreed to buy Starent Networks Corp for US$2.9B. Cisco’s stock added 0.5%, whereas Starent, which makes telecommunications equipment, surged 16.8%.

Healthcare stocks slid after a key Senate committee endorsed a sweeping healthcare overhaul as it gained the support of an influential Republican. The proposal will be merged with the Senate health panel’s version and moved to the full Senate for debate in the next few weeks.

Johnson & Johnson posted weaker-than-expected quarterly revenue as sales of prescription drugs and cardiac stents disappointed. Third-quarter profit topped analyst forecasts, but that was largely because of cost cuts and lower taxes. Third-quarter revenue fell 5.3%. Earnings beat analyst estimates by 7cps, helped by lower research and marketing spending. Shares in Johnson & Johnson fell 2.4%.

Intel reported its results after close. Third-quarter net income dropped to 33cps. Analysts had expected income of 27cps. Revenue fell 8.1%, but was above expectations. Gross margin was 58% in the third quarter, compared with Intel’s initial prediction of about 53%. The company gave a better-than-expected outlook for the fourth quarter. For the fourth quarter, Intel predicted sales would be US$9.7B to $10.5B, compared with analyst estimates for US$9.5B. Intel was halted in extended trading.

Other major companies releasing results this week include JPMorgan Chase, Citigroup, Goldman Sachs, Google, Nokia and IBM.

Crude oil rose to a seven-week high in New York on speculation world energy use will grow as the economy rebounds and as a weaker dollar spurs commodity demand. The Organization of Petroleum Exporting Countries (OPEC) increased its 2010 global oil-consumption forecast on economic expansion in emerging economies. OPEC predicts that total crude consumption will increase by 700,000 barrels a day to 84.93M barrels a day next year, led by demand from emerging markets. This year, the group forecasts global demand will contract by 1.4M barrels a day to 84.24M barrels a day.

Gold futures rose in New York on concern a weakening dollar and rising inflation will enhance the appeal of precious metals.

Australia: Taking the lead with higher rates, but who will follow?

In a move that surprised some analysts, the Reserve Bank of Australia (RBA) hiked its Overnight Call Rate by 25 basis points to 3.25%. After a spate of strong economic indicators, signs of recovery from Australia’s major trade partners and a moderation in price increases, the markets had priced in some monetary tightening before year-end. This hike confirms those expectations, and along with a few choice comments in the RBA’s accompanying statement, implies that another hike could hit by year-end. Given the economy’s recent performance, we have no complaints about tighter policy.

Today’s headlines made a special effort to point out the RBA’s move was the first tightening amongst the G-20, but in all candor we humbly ask who else could have been a viable contender? With the Euro-zone still struggling with problems in some of its weaker member countries, the US in quantitative easing mode and having posted negative GDP growth since Q4 2008 (although Q3 2009 figures due October 29 should break that streak), and Japan’s base rate having flatlined years ago, only a few niche players within the G20 could even offer a challenge against Australia for first to hike.

But now that the RBA has made its move, the more interesting question is who will be the next to pull the trigger. Right now, the likely candidates are all in Asia: Singapore, South Korea and China. Singapore currently stands as the favorite simply due to timing – the Monetary Authority of Singapore meets on Monday, and now has the opportunity to tweak its monetary stance without being the first in the pool. Its economy posted one of the first technical recessions in Asia due to a plunge in net exports, but in turn its recovery has been quite brisk and without any price pressures. While the temptation to let the economy feed off of cheap credit is very strong, the authorities now have some incentive to remove the ultra- from its ultra-loose monetary policy and start the long process of normalizing interest rates.

Also worth mention is South Korea, which just a year ago had to reassure foreign investors it was in fact not going to slide into the abyss a la 1998. The economy did go through a four-quarter weak patch, but in fact did not experience a technical recession and like many others came back strong in Q2 this year – thanks in part to a little fiscal priming. More to the point, the Bank of Korea timed its moves well over the past year, moderating its rate cuts as to not feed into a domestic asset bubble. Now with Australia taking the lead, the Bank can offer a hike as keeping in line with the regional recovery.

China is the least likely of the three to make a move, although the People’s Bank of China (PBoC) can throw a curveball now and then. Officials have offered the usual batch of central bank talk to cover all possibilities while not committing to a particular position, but the central theme from the PBoC suggests that while a recovery is well underway, it is an uneven rebound and there is still significant fragility in certain parts of the economy. Along with a few other key words we think China will remain on hold until early-2010, although given how much bank lending grew in the first half of the year we cannot help but wonder if inflation is a concern.

With global trade having restarted – although from a lower base – it is no surprise that Asia is seeing the first fruits of recovery. Now that the RBA has validated its personal belief that the worst has passed with its own rate hike, other economies will follow suit before the year is over. Whether those economies are ready for higher interest rates, however, is another story altogether.

Stock Market Wrap 8-10-09

The Australian market soared upon opening and reached a plateau for the rest of the morning, before lifting off again in the afternoon. The All Ordinaries finished Wednesday 99 points higher.

The S&P/ASX 200 closed 104 points up. The Materials sector surged, with winners including BHP Billiton (+$1.16), Rio Tinto (+$3.02), Newcrest Mining (+$2.22), Fortescue Metals (+$0.31), Lihir (+$0.17), Amcor (+$0.15), BlueScope Steel (+$0.08), Incitec Pivot (+$0.21), Alumina (+$0.09) and OZ Minerals (+$0.08). The Financials sector benefited from gains in the four majors: Commonwealth Bank (+$1.80), Westpac (+$0.33), National Australia Bank (+$0.93) and ANZ (+$0.55), plus a strong showing from Westfield (+$0.27), Macquarie Group (+$3.05), Suncorp-Metway (+$0.58) and Stockland (+$0.16). The Energy sector saw Origin (+$0.20), Santos (+$0.18), Oil Search (+$0.08) and particularly WorleyParsons (+$1.61) rise. In the Industrials sector, Leighton Holdings (+$1.27) and Macquarie Airports (+$0.16) gained but Brambles (-$0.41) extended its decline. Another notable loser was Singtel (-$0.14).

On Tuesday night, Rio Tinto took another step towards the development of a world class copper-gold resource in Mongolia with the signing of an investment agreement for the Oyu Tolgoi project with the Government of Mongolia. The government will address the conditions precedent and Rio Tinto and Ivanhoe Mines will commence the development phase. Production is expected to start in 2013.

US stocks rose for a third day as banks climbed on an analyst upgrade, while Alcoa jumped before beginning the third-quarter earnings season.

The S&P 500 fell for most of the day, as homebuilders declined on speculation Congress will not extend a tax credit. Pulte Homes, KB Home and DR Horton were down between 3% and 4%. AT&T led a slump in telephone shares after saying it will allow iPhone customers to use internet phone carriers.

Boeing, United Technologies, 3M and Travelers Companies were among the biggest decliners on the blue-chip average. They were also among the biggest gainers in the early-week rally.

Late in the session, a rally in a variety of financial stocks gave the market a boost. The Bank of America, the largest US lender by assets, and Wells Fargo each added 2.1%.

The benchmark index was further buoyed in the final hour of trading as investors speculated Alcoa, the first Dow company to report earnings, would post better-than-estimated results.

After market close, Alcoa reported its first quarterly profit in a year, as it benefited from improving metal prices and saved money by cutting jobs and reducing other costs. Profit, excluding one-time charges, was 4cps, exceeding analysts’ average estimate for a 9cps loss. Revenue was US$4.62B versus forecasts for US$4.55B. Results were weaker than those a year ago. Alcoa cut 18,000 jobs in the 12 months to June as the global recession depressed demand and prices for aluminium.

In other earnings news, Costco, the largest US warehouse club, reported fourth-quarter profit that fell less than analysts estimated as gross margin improved. Shares gained 1.8% in NASDAQ trading. Net income dropped 6% in the quarter from a year ago. Shoppers join the members-only warehouse club for basics, along with designer goods and other luxuries. Costco has seen sales of non-essential items fall as consumers pull back to cope with job losses and the recession. Costco runs stores in North America, Asia, Mexico, the UK and Australia.

Broad S&P 500 third-quarter earnings are expected to have fallen 25% from a year ago, extending the losing streak to nine quarters. Analysts expect the energy sector to report that profits fell 64% from a year ago. Industrials are expected to post a 45% drop in profits. Financials are expected to post the best results due to easy comparisons against an abysmal third quarter of 2008. The sector is expected to see earnings growth of 59%.

Stock Market Wrap 7-10-09

Buoyed by an encouraging lead from overseas, the Australian market started strongly but soon began to shed its gains, and lost more steam after the RBA’s rate hike. The All Ordinaries finished Tuesday 18 points higher.

The S&P/ASX 200 also closed 18 points up. The Materials sector rose, with BHP Billiton (+$0.33), Rio Tinto (+$0.88) and Newcrest (+$0.76) climbing while Fortescue (-$0.19) fell. The Energy sector gained, with winners including Origin (+$0.28), Santos (+$0.13), Oil Search (+$0.10) and WorleyParsons (+$0.75); Woodside (-$0.43) bucked the trend and declined. The Financials sector saw gains in Westpac (+$0.51), ANZ (+$0.20), Westfield (+$0.24) and Macquarie Group (+$1.05); however, Commonwealth Bank (-$0.18) and National Australia Bank (-$0.11) dipped. The Industrials sector saw Brambles (-$0.20) fall while Leighton Holdings (+$0.83) and Macquarie Airports (+$0.08) rose. Losers in the Consumer Discretionary sector included Harvey Norman (-$0.11), Aristocrat (-$0.25), Fairfax (-$0.06) and David Jones (-$0.30). In the Healthcare sector, CSL (-$0.45) and ResMed (-$0.14) softened.

The Reserve Bank raised the cash rate by 0.25% to 3.25%. Graincorp (in trading halt) is to acquire global malt manufacturer United Malt Holdings for an enterprise value of $757M. The acquisition is to be funded by a 9-10 entitlement offer at $5.65ps and institutional placement raising a total of $589M, and a US$200M debt facility. Graincorp also upgraded its FY09 NPAT guidance to a range of $60M-$63M and said it will pay a dividend equivalent to 15cps per existing share. Brambles’ CEO will retire from his role on 1 November 2009. Brambles’ strategic review of its North American CHEP operations endorsed the continued use of wooden pallets and an improvement in customer service.

US Stock Markets

US stocks extended a worldwide rally, on speculation third-quarter earnings will top estimates and growing conviction the global economy is improving.

Market breadth was positive. On the NYSE, winners topped losers by almost four to one. On the NASDAQ, advancers topped decliners two to one.

The stock advance was broad-based, with 29 of 30 Dow stocks rising as investors piled into a variety of stocks battered in the recent sell-off. Investors welcomed reports that Australia became the first major economy to lift interest rates since the start of the financial crisis.

Producers of energy and raw materials had the two biggest advances in the S&P 500 among 10 industries, rising around 2%. Alcoa and Newmont Mining climbed at least 3.5%, while Exxon Mobil gained 1.6% as crude advanced.

The MSCI World Index of 23 developed countries added 1.9%, the most in two months.

In company news, Boeing said it will take a US$1B charge in the third quarter because of higher costs to produce its 747-8 airplanes and tough market conditions. The stock was little changed and was the only Dow stock to not advance.

Alcoa is scheduled to release third-quarter results on Wednesday, the first company in the Dow average to report earnings. General Electric and Intel are among the Dow and S&P 500 companies that will report in the next two weeks. Analysts expect companies will report a ninth straight quarter of declining profits before returning to growth in the final quarter.

Overnight Stock Markets 6-01-09

Index/Security Close Chg %Chg

Dow Jones (US) 9,600 +112.1 +1.2

S&P 500 1,040 +15.3 +1.5

NASDAQ 2,068 +20.0 +1.0

US stocks rose as data showed service industries returned to growth after 11 months of contraction.

Banks led the advance, with the Bank of America, JPMorgan and Wells Fargo up between 4% and 7%. The KBW Banking index added 3.2%.

Department store chain Nordstrom climbed 9.5% for the biggest advance in the S&P 500 after analysts upgraded the stock. Limited Brands, the owner of Victoria’s Secret lingerie chain, climbed 7.6% after analysts raised their earnings forecasts for the company.

The US services sector expanded in September at a faster pace than expected, with the ISM’s services index coming in at 50.9, compared to a forecast of 50.0.

Alcoa is scheduled to release third-quarter results on 7 October, the first company in the Dow Jones index to report earnings. The company is expected to report a quarterly loss versus a year ago, reflecting a weak materials sector. Overall, S&P 500 profits for the third quarter are expected to have dropped almost 25% from a year-ago levels. Analysts expect companies to report earnings growth in the fourth quarter.

Among notable movers, Brocade Communications rallied 15% in unusually active trading on reports that it has put itself up for sale. Both Hewlett-Packard and Oracle were cited as potential buyers, according to media reports.

Since bottoming at a 12-year low on 9 March, the S&P 500 has gained 51.2% and the Dow has gained 45%. After hitting a six-year low, the NASDAQ has gained nearly 61%.

Overnight Stock Markets 5-10-09

US stocks fell on Friday as weak jobs data gave more evidence that the economic recovery would be less robust than expected.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of about two to one. On the NASDAQ, about nine stocks fell for every five that rose.

US employers cut a deeper-than-expected 263,000 jobs in September, lifting the unemployment rate to 9.8%, according to a government report on Friday. The Labour Department said the unemployment rate was the highest since June 1983. Payrolls have now dropped for 21 consecutive months. Friday’s report also showed companies cut working hours, pushing weekly earnings lower. The average work week shrank to 33 hours in September, matching a record low, while average weekly earnings fell to US$616.11.

Industrial companies in the S&P 500 fell 1.5%, the biggest decline among the index’s 10 industry groups. A report from the Commerce Department showed orders placed with US factories fell 0.8%, more than estimated, after a revised 1.4% increased in July. Excluding transportation equipment, orders rose 0.4%.

Energy stocks tracked crude prices lower. Chevron and Exxon Mobil both declined 1%.

More downbeat news came from General Electric (GE), which slid 3.8% after the CEO said the company was holding discussion on partnerships or an IPO for its NBC Universal unit (NBCU). According to media reports, GE and Comcast were discussing a deal under which the US cable firm would take control of 51% of NBCU with GE keeping the rest.

Apple shares were among the bright spots, rising 2.2% on an analyst upgrade.

The S&P index of consumer staples, up 0.6%, was the only positive S&P 500 sector. The sector was buoyed by a 4.2% gain in PepsiCo, which advanced after analysts upgraded the stock.

Alcoa, the biggest US aluminium producer, is scheduled to release third-quarter results on 7 October, the first company on the Dow average to do so. Analysts expect third quarter profits for companies in the S&P 500 to be down 23% from a year ago. For the fourth quarter, analysts expect profits to be up 63%.

Investors Get Back $18.31 Trilion

Below we highlight the total market capitalization of stocks both globally and in the US.  At its peak in 2007, total world market cap was $62.57 trillion.  By the lows this March, world market cap had dropped to $25.6 trillion!  That’s a loss of $36.97 trillion in stocks globally.  Since the March lows, however, world market cap has risen $18.31 trillion back up to $43.9 trillion.

In the US, market cap has risen $4.88 trillion from its low of $8.09 trillion in March.  The peak in total US stock market value was $19.14 trillion in 2007, and the current value of all US stocks is $12.97 trillion.  The US accounts for 29.5% of total stock market value in the world.

Source: Bespoken Research

International Stock Market Snapshot

Below we provide our unique trading range charts for 21 major country indices.  For each index, the light blue shading represents between one standard deviation above and below the 50-day moving average.  When the price is within this trading range, it is considered to be in “neutral” territory.  The red zone represents between one and two standard deviations above the index’s 50-day moving average.  Moves into or above the red zone are considered “overbought.”  Moves into the green zone (more than one standard deviation below the 50-DMA) are considered “oversold.”

With the exception of a few Asian countries, most indices shown below are trading into overbought territory.  China’s Shanghai Composite is the only index trading below its 50-day moving average.  Australia, Brazil, South Korea, Taiwan, the UK, and the US look to be the most overbought of the bunch.  After trading in perpetual downtrends for nearly all of 2008 and the first few months of 2009, most countries have now been trading in solid uptrends for five months now, with only a brief pullback here and there.  Brazil, China, Hong Kong, India, Malaysia, Mexico, Singapore, Sweden, Spain, South Korea, and Taiwan have all taken out their 52-week highs in recent months, while the rest still have a bit further to go.

Source: Bespoken Research

Goldman’s seven big questions about the economy

A recent Global Economics Weekly report from Jim O’Neil and the team at Goldman Sachs Global Economics highlights the answers to seven key questions that, according to them, should provide an indication of whether the improvement in the global economy and performance of world financial markets can be sustained.

1. Will leading indicators, as highlighted by our own GLI, continue to improve?

Will leading economic indicators continue to improve? We capture a wide variety of global data through our global leading indicator (GLI) and the GLI continues to show strong upward momentum. The GLI should lead the economy by a few months and we therefore are still optimistic about the coming months. As a result we have upgraded our economic forecasts for global GDP growth to 4% driven by improved (less bad) forecasts for the US, Europe and Japan.

2. Are the better signs in the US housing market likely to persist?

One of the sources of this crisis seems to have bottomed. The Case-Shiller house price index rose 0.75% in June, the 1st rise since May 2006.

3. What will tighter financial conditions in China do to growth?

Chinese policymakers have indicated they may want to slow the pace of lending and tighten financial conditions, but so far we see no evidence in the data for this.

4. Will Chinese import growth continue to accelerate relative to exports?

Import growth in China has been stronger than export growth. Popular wisdom holds that China only exports. It may be possible that China does have domestic demand and may play a role in the global economic recovery and the rebalancing of the world’s imbalances.

5. Is the recent positive surprise in Euro-area activity a one-off, or is it set to continue?

Europe, particularly Germany and France, surprised on the upside in the 2nd quarter. Looking at the breakdown of German GDP, we noted a 2nd quarter of positive personal consumption, something we believed Germans didn’t do. German forward looking surveys (e.g. PMI, IFO) continue to surprise on the upside, so the Q3 data should be an important item to monitor to see how the Eurozone as a whole will develop.

6. Will inflation continue to behave, despite improving growth and accommodative policies?

As we have argued many times, we don’t believe inflation to be a significant threat in the near term. There is too much spare capacity for inflation to really take hold. Monitoring inflation data should confirm this view.

7. When will policymakers withdraw the stimulus?

Investors are starting to get concerned about exit policies. We believe that policymakers will only start withdrawing stimulus measures once they perceive that their economies can sustain growth without their help. Only if we continue to see significant surprises on the upside, will they start earlier than we forecast now. This would however be a change of strategy for positive reasons. We believe also that the private sector will return at a certain point and that the world will be able to survive without government support.

The Goldman team concludes: “Based on our latest forecasts and recommended trading strategies, we expect equity markets and other risky assets to continue to perform generally well as we move into the final third of the year.”

Source: Goldman Sachs

How to interpret the Dow Theory bull signal, according to Richard Russell

There was a great deal of interest in my recent post “Dow Theory calls a bull market“. Readers had many questions on what brought about the Dow Theory bull signal, and specifically whether Richard Russell, “Mr Dow Theory” and author of the Dow Theory Letters, was the last bear standing when he replaced the bear on the first page of his daily newsletter with a long-horned Texas bull.

Who better to ask for more background on his thinking than the R man himself? The paragraphs below are excerpts from his latest newsletter.

“For four frustrating months or ever since the March lows, this writer [Russell] has been in a state of perplexity, better known as confusion. Now, at last the picture has clarified. I would like my subscribers to study the following explanation carefully. I’m going to explain why the trend of the stock market has turned clearly bullish under Dow Theory. The fooler was that this pattern did not occur immediately off the March lows – but it took place part-way up the rally and four months after the March lows.

“Please, refer to the charts of the Industrial and Transportation Averages below.

(1) The Industrials (top chart) recorded a low in May at 8230.

(2) The Transports also established a low in May at 2971.

(3) Next, both Averages rallied to June peaks, the Dow to 8877 and the Transports to 3434.

(4) Both Averages then turned down, with the Dow breaking support and declining to 8087. But important – note that the Transports held support and did not confirm the Dow weakness.

(5) After the Transport non-confirmation, both Averages rallied, and both Averages broke out above their June peaks.

“This was a classic Dow Theory bull market signal! To review – we saw the two Averages decline with one Average (Industrial) breaking to a new low while the other Average (Transports) refused to confirm. Next, we witnessed a rally with both Averages breaking out to new highs.

“Note – Both Averages are now overbought, based on the level of the RSI.”

Source: StockCharts.com

“The trend of the stock market is now bullish. But this is where interpretation is critical.

“Nowhere during 2008 or 2009 did we see anything typical or characteristic of a major bear market bottom. However, recently we witnessed a Dow Theory bull market signal. My interpretation? We are now in a cyclical bull market as opposed to a secular or primary bull market. In effect, we’re in an extended bear market rally. The true bear market bottom lies somewhere ahead.

“There is no way of knowing how high this bear market rally might carry. The question – is it worth playing this cyclical bull market? My answer is yes, but play it very conservatively and carefully.”

And that is the word according to a long-timer that has spent more than half a century following the ticks on the tape.

As an aside, I have been subscribing to the Dow Theory Letters for more than 26 years and highly recommend them for the stimulative nature of the content.

Source: Investment Postcard

RIO Tinto Limited (Ex Today)

Renounceable issue of ordinary shares at a price of A$28.29 per share. New shares rank pari passu with existing shares.

Underwriters: Credit Suisse (australia) Limited, J.P. Morgan Australia Limited, Macquarie Capital Advisers Limited, RBS Equity Capital Markets (Australia) Limited, Deutsche Bank Ag - Sydney Branch, Morgan Stanley Australia Securities Limited, and Societe Generale.

Note: Rio Tinto Limited has obtained a waiver from the ASX allowing the timetable for the Rio Tinto rights issue to be shorter than that ordinarily required under the ASX listing rules.

The date for second posting of Rio Tinto Limited entitlement and acceptance forms to qualifying Rio Tinto Limited Shareholders (i.e. Rights Despatch Date) is 26 June 2009.

Technical talk: S&P 500 turning down from 950 again

The S&P 500 Index is stalling again and now turning down from the 950 area. Given the large run-up off the lows it should not be a surprise to anyone to see the market starting to stall, pause or retrace. However, just as the market bottomed and rallied in the face of bad news, we are now getting the exact opposite where the news flow is improving or good and the market is selling off. It is this action of selling off on good or less than bad news that troubles us more than anything.

Early warnings of the loss of momentum can be traced back to early May when the S&P 500 broke below two faster-accelerating trend lines and then subsequently failed to climb back above them. To keep things in context, Monday’s action looks like a small blip so far, but we have to be aware that the S&P 500 has now failed on numerous attempts to get back above 950 and is now testing a less accelerated trend line while its RSI momentum diverges from price. Any movement below that aforementioned trend-line level would suggest the market may want to test the next level of support near 875.

At this point the low-hanging fruit has been picked and easy money has been made and traders/investors need to be more selective while the market corrects the excesses of the run off the lows. It doesn’t mean money can’t be made on the long side or we that we have to have a full retest; it just means being patient, and buying the next corrective wave may make more sense than chasing. To get a renewed bullish outlook, 950 will need to be taken out on a solid upside breadth day (i.e. good ratios for advance/decline and up/down volume).

Source: Kevin Lane

If It Looks Like A Bull, Walks Like A Bull, And Acts Like A Bull …

Since humans have been greedy and fearful since the beginning of time, they tend to act in similar ways before, during, and after a financial crisis. These tendencies manifested themselves during the tulip bulb craze of the 1600s, the dot-com craze of the 1990s, and the real estate mania of the 2000s.

The table shown below allows you to visualize the transition that has taken place between March and June of 2009. In March (far left side of the table), most markets had the characteristics of a bear market. Currently (right side of table), numerous markets look much more like an early bull market than an on-going bear market. Below, we will use the S&P 500 (2000-2004) to illustrate and expand on the concepts as they relate to the current day and the information presented in the table below.

Printed Money And ‘Less Bad’ Economic News

In 2009, the basic rationale for driving stock prices higher leans heavily on the “less bad” perception of future economic activity. The markets, as evidenced by credit spreads, commodity prices, and stock prices, have been able to move away from “the end of the world as we know it” mode. An unprecedented amount of economic stimulus and newly printed money has helped shift the primary fear from one of deflation to a possible loss of purchasing power caused by inflation. The market’s perception seems to be “if things get worse economically, and they may, the policymakers’ response will be more stimulus and more printed money”. This perception coupled with the “less bad” outlook has increased the demand for inflation-friendly and weak-dollar assets (oil, gasoline, copper, emerging market stocks, foreign bonds, commodity-related currencies, etc.).

By studying past bull and bear market cycles, we can better understand what to look for during a possible transition form a bear market, dominated by fear, to a bull market which eventually becomes dominated by greed. If we are not aware of the twin thieves, greed and fear, they will rob us and hamper our ability to grow our accounts. As we have stated in the past, in a bull market:

• Price tends to stay above the 200-day moving average(MA) (red line).
• The 50-day moving average (blue line) tends to stay above the 200-day moving average.

In bear markets, professionals tend to buy at extreme points of pessimism looking for a profitable trade. Traders often ride a market back to its 50-day or 200-day moving average and then take profits. In a bear market, traders tend to sell at the 50-day or 200-day because their fear of losses remains greater than their confidence the market can move higher. Their lack of confidence speaks to their pessimistic view of future economic activity. Bear market rallies are mainly fueled by traders and lack participation from longer-term investors.

In a bear market (see above), where conviction is lacking to push prices higher:

• Price (black line) tends to stay below the 200-day moving average.
• The 50-day moving average tends to stay below the 200-day moving average.

At some point in a bear market, the perception of traders and investors slowly starts to shift toward the acceptance of better times ahead (or “less bad” times). When their confidence, and more importantly their conviction, becomes strong enough, instead of selling at the 50-day or 200-day moving average during a rally, they hold thinking the markets may be able to move higher. If enough investors and traders share the same improved outlook, a market is finally able to clear previously insurmountable hurdles in the form of the 50-day or 200-day moving average.

Emerging Markets Have Lead The Way Higher

Since the S&P 500 is a laggard in the current market, we will use the Emerging Markets Index to illustrate how numerous leading markets, asset classes, and sectors look in June of 2009. If you compare the chart of the Emerging Markets Index below to the This is What A Transition From A Bear To Bull Looks Like chart above, and do it with an open mind, you will be hard-pressed to come away with a bearish interpretation.

Leading Markets Are Holding Above Their 200-Day MAs

When buyers have enough conviction to push a market above its 200-day moving average during a bear market, they are often immediately greeted by heavy selling. The crossing of a 200-day moving average means little if the market cannot successfully retest and hold it. The longer a market stays above the 200-day MA the more meaningful and bullish it becomes.

Part Of The Pattern: Not Accepting The Possibility Of A New Bull

The fact few are willing to call the current rally anything more than a bear market rally fits well with the historical profile of new bull markets. No one, can definitively say a new bull market has or has not started – only time and future market action will tell. However, we can confidently state that what has transpired since the March 2009 lows compares very favorably with the end of a bear market and the beginning of a new bull market. How long a new bull might last is also something that can only be definitively answered in retrospect. While market conditions have improved, risk management must remain a significant part of any investor’s game plan. Even bull markets can experience significant corrections.

Check Your Forecast At The Door

Our job is not to agree or disagree with the market’s collective bullish stance. The market does not care what we think and is going to do what it is going to do regardless of any bullish or bearish analysis we can produce. The same can be said for any individual, investment firm, or talking head on TV – the market does not care what they “think”. Our job is to discern as best we can the prevailing risk-reward profile of any given market. The evidence at hand strongly supports a shift from unfavorable conditions for investing to favorable conditions for investing. The purpose is not to forecast, but to understand what is in front of us at the present time while understanding the current bullish evidence may not be in place in a few weeks or months. It is important that we keep an open mind about both bullish and bearish outcomes in order to process future signals from the market with an unbiased mind. This is one reason why we look to minimize bullish and bearish debates with clients – we are human beings and we can become biased just like the next guy. If the markets continue to go up, we want to participate. If the current bullish signals are discounted with obviously bearish action, we will shift our strategy accordingly.

Forecasting Can Lead To Defending

As we have stated for years, forecasting can lead to biased interpretations of future market activity. If we tell you this is a bear market rally, we will look for reasons to remain bearish from both a fundamental and technical perspective. Rather than producing and possibly needing to defend a forecast, we simply need to pay attention to what has and is actually happening. If you approach the current market with an open mind, and with a sense of history, it is nearly impossible to ignore the almost countless reasons to accept the possibility a new bull market has started – one that could last longer and go further than most can even imagine. Knowing what we know, it is prudent to continue to deploy capital as long as conditions remain favorable. It is also necessary to respect the numerous fundamental problems that remain and to understand the market’s bullish stance may be relatively short-lived.

Fundamentals Are Built Into The Charts

Charts are a way of monitoring the current risk tolerance and collective economic outlook for all market participants. Every bit of fundamental analysis and its impact on investor behavior is built into the charts. Fundamental analysis from the largest brokerage houses and the most successful hedge funds is reflected in the charts. The charts are clearly stating that the collective fundamental outlook has improved greatly in the last 90 days. If the collective economic outlook was not greatly improved relative to prior expectations, numerous asset classes would not have received the conviction from buyers necessary to overtake their 50 and 200-day moving averages. What has happened since the March 2009 lows is most likely not a purely technical event. A purely technical event or a bear market rally from oversold conditions most likely would have failed long ago. If we are willing to listen, the markets are trying to tell us the next 12 to 18 months may not be as bad economically as many believe. The longer the markets can hold above their 200-day moving averages, the more significant the technical and fundamental signals become.

Source: Chris Ciovacco

Oil Bull Market: Fast and Furious

Oil has now rallied 108% over the last 118 calendar days.  Based on the standard bull market defintion of a 20% rally preceded by a 20% decline, the current oil bull is already the sixth strongest since daily pricing begins in 1986.  In terms of duration, it only ranks 14th out of 26.  The average gain for prior oil bull markets has been 66.09%, while the average duration has been 217 days.  This makes the current rally in oil nearly twice the average bull market gain in nearly half of the average duration.

Source: Bespoken Research

Baltic Dry Index – more than a snap-back rally

The Baltic Dry Index – a measure of freight rates for iron ore and bulk commodities – rose non-stop for 23 sessions until Wednesday, before declining somewhat yesterday. This surge represents a gain of 517% from its low on December 5. But one needs to put this in perspective: the Index fell by 94% from its high in May 2008, and therefore still needs to rise by a further 188% to match the previous peak.

More importantly, this rise seems to be more than a snap-back rally and points to better economic tidings. This becomes apparent when considering the close relationship between China’s Purchasing Managers Index (PMI) for New Export Orders and the Baltic Dry Index, showing both indices turning sharply higher.

Source: Plexus Asset Management (based on data from I-Net Bridge)

Also, the improvement in China’s PMI (with the composite Index back in expansionary territory above 50) and the Baltic Dry Index is consistent with the improvement in the Metals Index.

Source: Plexus Asset Management

Baltic Dry Index Now On 23-Day Winning Streak

The Baltic Dry Index, which measures global shipping rates, continues to soar back from its low of 663 seen in late 2008.  The index is currently on a 23-day winning streak, and at 4,291, it is up 547% from its low.  Unfortunately, the Baltic Dry fell 94.7% from its 2008 high, so it still has to rise another 175% to reach new highs.  Regardless of the distance from its prior high, the sharp rebound in shipping rates definitely provides ammo for those that argue that the global economy is recovering.

Source: Bespoken Research

China – Secular bull in commodities remains intact

The Chinese Purchasing Managers Index (PMI) for May remained in the expansionary zone of higher than 50%, although it moderated to 53.1% from 53.5% in April, according to Li & Fung Research Centre. Although eight of the 11 sub-indices were slightly lower than their respective levels in the previous month, it is noteworthy that the new export orders index returned to the expansionary territory for the first time since June 2008. “Strong domestic demand, together with an improving export situation, has helped resume the expansion of the manufacturing sector in China, “said the report.

China’s PMI seems to indicate that the country might have seen the worst of the GDP growth statistics. (The Hong Kong PMI is used as a proxy of the Chinese PMI prior to 2004.)

Source: Plexus Asset Management (based on data from I-Net Bridge)

Importantly, China’s PMI for new export orders shows the Index again expanding (i.e. above the 50 level) and, based on the close relationship with the Metals Index, should provide further support for commodity prices.

Source: Plexus Asset Management (based on data from I-Net Bridge)

David Rosenberg, the closely followed chief economist and strategist of Gluskin Sheff, argues in a newsletter on Monday that the Asian economic revival, with strength spreading across the continent, may be for real. This is, needless to say, bullish for the commodity complex, with gold, copper and oil all having broken above their 200-day moving averages just as the US dollar has cracked below its key support level.

“The US is still the largest economy in the world by far, but it is losing its dominance each year and the fact of the matter is that it is a mature service-driven economy. Emerging Asia in general, and China in particular, are still the marginal buyer of basic materials, and their economic success is more critical to the outlook for commodities,” said Rosenberg.

He highlights that the world has just endured the steepest world economic setback in 70 years and yet commodity prices across a broad front – gold, oil, copper, soybeans -  managed to bottom at their highest “recession levels” of all time. “This attests to the supply discipline by today’s resource companies compared to their predecessors, and affirms our belief that what we experienced last year was a severe cyclical correction in what is still a secular bull market – you can connect the dots on the chart and see that the CRB looks a lot like what the S&P 500 looked like in the months following the sharp 1987 collapse,” said Rosenberg. It seemed like the end of the world in October of that year, and yet in retrospect it was just the fifth year in what proved to be an 18-year secular bull phase.

My research concurs with Rosenberg’s conclusion that commodities still seem to be in a supercycle that was only temporarily interrupted by the global economic malaise. As inflation money finds its way into commodities, it is still not too late to purchase these, but only on price corrections that are bound to occur from time to time.

Source:Prieur du Plessis

RBA on hold but surprisingly dovish

The RBA left the cash rate at 3% today. This was universally expected by forecasters and markets.

The surprisingly dovish accompanying Statement was of interest however. The RBA remains focused on underlying economic weakness and ongoing financial fragility. China was seen as an economy displaying the ‘clearest’ signs of recovery.

But most surprising was the explicit recognition that the RBA can cut further:
“…the prospect of inflation declining over the medium term suggests that scope remains for some further easing of monetary policy, if needed. In assessing how it might use that scope, the Board will continue to monitor how economic and financial conditions unfold, and how they impinge on prospects for a sustainable recovery in economic activity.”

This seems a little at odds with the better flow of economic information recently and improvements in global equity and commodity markets. Our guess is that the RBA is try to calm some recent trends in local markets, in particular rising term interest rates and the winding back of easing expectations, but probably more importantly the strong rise in the Australian dollar on both a $US basis as well as on a TWI basis (up 22% since the beginning of February).

While this is just a guess, the sentiment that rates can be cut further is consistent with our view that the Australian economy is likely to experience an extended period of weak economic growth and that we are yet to see the fall-out from rising unemployment (and falling employment). While the rapid policy stimulus of 2008-09 appears to be working well (tomorrow’s GDP is expected to rise by around 0.4%) it cannot be assured to continue to support growth through the back half of the year.

We expect the RBA is likely to be on hold for at least the next few months. We have the next cut in August but are ambivalent about the timing given the inherent difficulties in forecasting trends in employment and domestic demand at present. We are happy with the view that the RBA cash rate is likely to trough at somewhere between 2% and 2.5% in this cycle.

Source: ANZ Global Markets

S&P 500 Breaks Above 200-Day Moving Average

The S&P 500 has broken above its 200-day moving average this morning for the first time in 524 calendar days (359 trading days).  Below is a price chart of the S&P 500 as well as a chart of its 200-day moving average spread.  If the index can close above its 200-day today, technicians will treat this as a positive for the market going forward. 

Source: Bespoken Research