Friday, October 31, 2008

A cold Christmas for on-line retailers?

The Tech Trader Daily site had a post today that nicely laid out the slide in e-commerce sales growth this year on a month-by-month basis. The data comes from Comscore and looks like this:

  • April: +15%
  • May +12%
  • June: +11%
  • July +8%
  • August: +6%
  • September: +5%
Clearly, it's not a pretty picture; especially for an industry that is used to growing at double digits.

What about the all-important Christmas shopping season? Will e-tailers be able to show enough growth to overcome the weakness in the months leading up to the holidays?

Don't count on it.

As the evidence increases that consumers in general are reluctant to spend, estimates for the holidays are coming down.

Despite the fact that the percentage of shoppers using the Internet continues to increase, it appears we are hitting a speed bump.

The following chart is from eMarketer and it shows that growth in holiday online sales will be the weakest in years.

E-Commerce Holiday Sales Growth
The folks at eMarketer are expecting a mere 10% growth over 2007. That would normally be considered a failure given that year-over-year growth generally tends to be in the neighborhood of 20%.

It has often been said that online shoppers are more affluent and sophisticated and, as such, would not be as susceptible to the vagaries of the general economy. eMarketer quotes pollsters who assert that shoppers are planning to reduce spending both on-line and off-line.

If you are looking for a way to play this situation as an investor, there is always the ProShares Ultra Short Consumer Services ETF (SCC). It has a broad assortment of companies that sell products and services to consumers, some on-line and some off-line. This ETF is falling back from a peak over $180 as markets have decided to ignore recent bad economic reports on consumer spending. Currently at $124.90, a patient investor can probably pick this ETF up for close to $100 if market sentiment remains positive for another week or so.

Sources:

E-Commerce Sales Growth Slows For 5th Straight Month

Online Holiday Sales Forecast

Will the Grinch Steal This Year’s Online Holiday Shopping Season?



Thursday, October 30, 2008

ProShares ETF Links - the list for Oct, 30, 2008

Today we have another list of links to posts by other bloggers that are writing about ProShares ETFs. As usual, this week's list is comprised mostly of posts from Seeking Alpha. I recommend that you click through to the authors own sites after reading these posts on the Seeking Alpha site.


Thu, Oct 30DXD
Options Trader: Thursday Outlook at Seeking Alpha
Thu, Oct 30DIG
DUG
Really Diggin' DIG at Seeking Alpha
Wed, Oct 29SKF
UYG
Three Areas of Opportunity for the Bold at Seeking Alpha
Wed, Oct 29FXP
QLD
Options Trader: Wednesday Outlook at Seeking Alpha
Wed, Oct 29SKF
Can Capital Expansion and Fed Action Co-exist? at Seeking Alpha
Tue, Oct 28TBT
Markets/Irrational/Longer/Solvent at Seeking Alpha
Mon, Oct 27USD
Six Months, 17 Metrics: A Week by Week View at Seeking Alpha
Mon, Oct 27SSO
The Power of the RSI at Seeking Alpha
Sun, Oct 26SSO
Leveraged ETFs: Not For Long Term Investors at Seeking Alpha
Fri, Oct 24DUG
OPEC's Cuts Can't Fight Global Recession Headwinds at Seeking Alpha
Fri, Oct 24DXD
Options Trader: Freaky Friday Outlook at Seeking Alpha
Fri, Oct 24DXD
MZZ
SDS
SKF
SMN
How to Construct a Deflation Proof Portfolio at Seeking Alpha
Fri, Oct 24SDS
SSO
Extreme Stock Market Volatility Equals Derivative Market Mayhem at Seeking Alpha
Thu, Oct 23QID
SDS
TWM
Market Perspective: the Long and Short of It at Seeking Alpha
Wed, Oct 22QID
QLD
Options Trader: Wild Wednesday Outlook at Seeking Alpha
Tue, Oct 21QLD
ROM
Technology: Have We Hit a Bottom? at Seeking Alpha
Tue, Oct 21MZZ
QID
SCC
Making a Move from Worried Bear to Cautious Bull at Seeking Alpha
Mon, Oct 20DOG
PSQ
ETF Update: Playable for a Rebound? at Seeking Alpha
Sun, Oct 19DIG
DUG
Why Oil And Gold Are Headed Much Higher at Seeking Alpha
Sat, Oct 18SRS
Watching the Malls: As Goes Retail, So Go Communities Across America at Seeking Alpha
Fri, Oct 17EFZ
Bonds, Baseball King at The Wall Street Journal Online

In order to go beyond what Seeking Alpha has to offer, I am also providing this link to the Google "Search Blogs" feature that will return any blog post that includes the symbol for one of the ProShares ETFs that was written in the last month. Bookmark this post and come back to use this link at any time. There may be some overlap with the content from Seeking Alpha.



Wednesday, October 29, 2008

Durable goods report reveals more tech weakness

The US Census Bureau just released the advance Durable Goods report for September.

It shows that the tech sector took another beating.

At a summary level of Computers and Electronic Products, Shipments were down sequentially 2.1% and New Orders were down 1.4%. This was after a terrible August number where shipments were down 5.6%; therefore, we are seeing further declines in September from an already bad number.

Looking at the sub-categories, first up we have Computers and Related Products. In this sector we see Shipments were finally up slightly at 0.8% after two bad months in a row but New Orders were down 2.1%. Given that New Orders were down 13.1% in July and up only 0.7% in August, we again have further deterioration from a prior run of bad numbers.

We have mixed results in the Communications sector where a 2.6% gain in Shipments was recorded while a big 14.6% drop in New Orders was registered.

Finally, we have Semiconductors. New Orders are not tracked in this sector but Shipments are. Back in July, Shipments grew a whopping 38.9%. Since then we have registered a drop of 18.6% in August and another drop of 13.6% in September.

Conclusion --

The tech sector is on the way to a weak fourth quarter. Now is typically when shipments and new orders start ramping up as manufacturers begin production of the consumer electronics products that are slated for holiday purchases.

Semiconductors are often seen as the leading indicators. At the heart of consumer electronics are the chips and integrated circuits. If they are not being shipped by now in increasing quantities, it suggests that manufacturers have lowered expectations for sales this holiday season. That can't be good for tech stocks.



Monday, October 27, 2008

Could automakers take same route as airlines?

When the going gets tough in a particular industry, the companies involved go to the government. When competitiveness has been lost, the non-competitive want to dump their pension plans.

This means they march to the Pension Benefit Guaranty Corporation, known as the PBGC.

Back around 2002 it was the steel industry. The following companies went to the PBGC to unload their pension plan responsibilities: Bethlehem Steel (one of the biggest plans to be terminated), National Steel, Northwestern Steel and Wire, Weirton Steel, Kaiser Steel and more. Many of these companies declared bankruptcy and shut down plants. Whatever was still valuable was sold off or merged into the remaining bigger, stronger steel companies that were still standing.

More recently, the airlines pulled a similar move: United Airlines, TWA, Aloha Airlines and US Airways all terminated their plans and turned them over to the PBGC. The difference in this case is that some of the companies had no intention of closing their doors for good. They took the descent into bankruptcy as an opportunity to trim down, shed liabilities and come back to fight another day.

As the automakers go to Washington to beg for funding for mergers that may or may not make sense, it is only a matter of time before the most wounded among them begins to evaluate the strategy the steel companies and airlines followed: declare bankruptcy and terminate the pension plan, allowing it to be taken over by the PBGC. Emerge from bankruptcy without the onerous and expensive need to support the thousands of retirees that increase the cost of each car produced. Instantly be more competitive with the Japanese and South Korean car companies.

According to the Wall Street Journal, GM alone provides health care and pensions for 480,000 retirees. This will cost the company over $64 billion between 2009 and 2017. In 2005, pension costs were estimated to add $700 to the cost of each car produced with health care costs adding another $1500. With the horrific performance of the stock market this year, the pension fund is projected to be underfunded by as much as $18 billion by the end of 2008.

There are already plans for GM to move their health care responsibilities to a trust managed by the UAW. It will cost them billions of dollars to do so and still they will remain uncompetitive. If GM can't find an entity that supports the merger with Chrysler, look for the company to fly the same route that the airlines took: straight to the PBGC.

Disclosure: none



Saturday, October 25, 2008

Weekly Review - is the cup half full or half empty?

Questions of the day: Is the cup half full or half empty? Have we hit the bottom or is there more pain in store? Should we buy or sell?

This past week saw continued improvements in the credit market with Libor declining and slight glimmers of activity in commercial paper now that the Fed is backstopping that market, too.

Commodity prices fell again. For those who are inclined to the optimistic side, this is good news for consumers. For those inclined to be pessimistic, this is a further signal of demand destruction and another indicator of how long and deep the recession will be.

Earnings season proceeds apace. Optimists point to the greater than expected number of companies that are beating analyst expectations. Pessimists point to the almost uniform negativity of forward guidance provided by nearly every company and the increasingly common announcements of job cuts.

Further evidence that decoupling is a myth was provided when the UK reported a 0.5% decline in their third quarter GDP, foreign markets tumbled and the US markets followed suit.

Apparently, those who think the glass is half empty prevailed this week as the Dow fell 5.3%, the S&P 500 fell 6.8%, the Nasdaq plunged 9.3% and the Russell 2000 fell double digits, tumbling 10.5%.

Despite a number of former bears announcing that they think stocks are now cheap enough to buy at current levels, most investors seemed more inclined to sell.

Against this backdrop, most technical analysis indicators are predictably bearish. Among the ones we track, only a few show any signs of better times ahead.

TradeRadar Alert HQ Stock Market Statistics --

Each week our Alert HQ process scans over 7200 stocks and ETFs and records their technical characteristics. Primarily we look for BUY and SELL signals for our free stock alerts; however, we also summarize the data in order to gain insights in the week's market action. The following chart based on daily data presents the state of our technical indicators:

Stock Market Statistics based on daily data, 10-24-2008
Moving Average Analysis --

We track the number of stocks that are above various moving averages. The number of stocks above their 20-day moving average actually increased for the second week in a row. Meanwhile, the number of stocks above their 50-day moving average declined. The number of stocks whose 20-day MA is above their 50-day MA continues to decline though for the last two weeks now it has been declining much more slowly.

Trend Analysis and Buying Pressure --

As for the trend indicators, we see the negativity diminishing. We use Aroon analysis to generate our trending statistics. We actually see a small increase in the number of stocks exhibiting strong up-trends though the short and ultra short ETFs are making up a good portion of the number. More encouraging is the fact that we see the number of stocks exhibiting strong down-trends has decreased dramatically, going from 5447 to 2989.

We use Chaikin Money Flow to track buying and selling pressure. Happily we see a slight improvement in buying pressure this week despite the big drops in the major averages.

The next chart shows the same indicators based on weekly data rather daily data. With these curves moving more slowly, this week's results provide absolutely no improvement in outlook. Each one of the indicators shows further deterioration though that deterioration is not accelerating.

Stock Market Statistics based on weekly data, 10-24-2008
We often show a weekly chart that provides an analysis of each sector in the S&P 500. This week we again don't bother to show the chart. There is only one stock exhibiting an Aroon up-trend, one stock exhibiting an up-trend according to DMI analysis and only nine stocks whose 20-day MA is above their 50-day MA. Essentially, the chart would be nearly blank as the 500 stocks in the index are nearly all devastated and we are registering the worst numbers since we started keeping track.

Conclusion --

Looking at our stock market statistics based on daily data, it looks like stocks are trying to put in some kind of bottom. The fact that we more or less held the previous lows and that a few more stocks are above their 20-day moving average is hopeful. It appears that, in aggregate, the fall in stock prices is at least slowing.

On the other hand, looking at the stock market statistics based on weekly data, the trend still appears, without question, to be down.

Investors are now taking improvement in credit markets and last quarter's earnings for granted and are focusing instead on earnings guidance and expectations for how deep a recession we may have to endure.

It is said that the stock market is a forward looking indicator. Thus far, it seems the market is looking forward to rough economic times.

What might we see to change the minds of investors?

This week we will receive plenty more earnings reports from the likes of Verizon, SAP, U.S. Steel, Valero Energy, Legg Mason, Moody's, Newmont Mining, ValueClick, Exxon Mobil, CBS and many more.

We also have a heavy schedule of economic reports coming up this week: new home sales, consumer confidence, durable goods orders, crude inventories, advance GDP for the last quarter, initial jobless claims, personal income & spending, Chicago Purchasing Managers Index and the Michigan consumer sentiment survey. In addition, the statement from the last FOMC meeting will be published.

Plenty for investors to chew on. Prepare for the stock market to bounce up and down like a yo-yo. No matter whether you think the glass is half empty or half full, I wouldn't be surprised to see the glass tip over this week.



Free Stock Alerts - Alert HQ for Oct 24, 2008

This post is to announce that the latest list of free stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. We apply a combination of proprietary and standard technical analysis techniques to identify those stocks that are beginning to move. Our goal is to identify stocks or ETFs that are undergoing reversals, either to the upside or to the downside.

This week, major indexes gave up more than they had gained in the previous week. Concerns over global recession hit markets worldwide and the U.S. was sucked into the vortex like everyone else. To my surprise, we didn't even get the dead cat bounce that I was expecting; investors just continued to drive the markets down. As can be expected, against this very negative backdrop we have few BUY signals. We also see that the number of SELL signals is decreasing as so many stocks have already rolled over to the downside. Here is the breakdown for this week:

  • based on daily data, we have 9 BUY signals and only 3 SELL signals
  • based on weekly data, we have 1 BUY signal and 74 SELL signals
Stop by Alert HQ and download your free lists. The alerts based on weekly data show those stocks that have exhibited some good follow-through after a recent trend reversal. If you want to be early in identifying the newest trend reversals, the lists based on daily data are for you. No matter which preference you have, there are bound to be a few stocks you will want to add to your watch list.



Wednesday, October 22, 2008

Who will the leaders be when the next bull market begins?

Merrill Lynch just released their latest installment of the RIC Report, the periodic update from their Research Investment Committee led by well known investment strategist Richard Bernstein.

Among other things, the report makes the point that "extreme volatility always signals a change in leadership". We are certainly seeing extreme volatility these days with the VIX hitting records left and right.

To determine who the new leaders will be, it is necessary to identify who the former leaders were and why they attained leadership. The RIC Report specifies the following:

Our theme continues to be that every growth story of the past 5-10 years has been based on the credit bubble. Whether it is China, Emerging Market infrastructure, energy, commodities, residential real estate, hedge funds, or private equity funds, the similarity they all share is that they are extremely capital or credit intensive and had easy access to cheap capital.

The days of easy access to cheap capital are over. The market’s new leaders will be the assets that are best suited for the new economic realities.
The current set of faltering leaders, in Merrill's estimation, are the most capital intensive sectors: Small Caps, Energy, Commodities, Emerging Markets, Housing, Real Estate and Low Quality Bonds.

Who are the new leaders?

Merrill expects the new leaders to be derived from the following: higher quality assets, developed markets, US Large Cap stocks and non-US Small Cap stocks.

In defining higher quality assets, Merrill is looking for cash-flow stable companies, especially those companies that offer dividends. Among the sectors Merrill likes are Consumer Staples and Health. Among developed markets, they like the U.S. and Japan.

The Merrill approach seems to be pretty conservative and rather defensive. What if an investor is looking to take on a little more risk?

It seems clear that the days are over when financial engineering could drive the economy. With deflation of the credit bubble, increased scrutiny from regulatory bodies and the government even owning stakes in many financial companies, I suspect we will see much less of the shenanigans that got us where we are today. As those companies that benefited from the old environment begin to take a diminished role in the economy, there could be a resurgence in the prominence of companies that make "stuff".

This means we could see the old fashioned Industrial sector begin to make a comeback. This, in turn, implies that worker productivity will again be a defining factor. How do most companies increase productivity? Usually through better use of technology.

So it is my opinion that the Tech sector could turn out to be one of the leaders in the next bull market. In a nod to Merrill's analysis, I can see the large-cap tech stocks being especially strong in this situation. These are the bellwether stocks with major market share, billions of dollars in cash and international operations like Cisco Systems, IBM, HP, EMC and Intel.

Conclusion --

Though we seem to be in the most depressing stage of a severe bear market, it is not too early to be looking forward to what comes after. When the next bull market starts, and it surely will eventually, it is useful to have an investing strategy in place. I would submit that Tech, especially large-cap Tech, could be one of the strategies worth consideration.

Disclosure: none



Monday, October 20, 2008

From worried bear to cautious bull?

Credit markets are showing glimmers of improvement. Note the following quotes from MarketWatch.com:

The cost of short-term dollar loans dropped more than expected Monday, a signal that money markets are slowly returning to normal after threatening to derail the global financial system earlier this month, economists said.

The London interbank offered rate, or Libor, for three-month dollar loans fell to 4.05875%, down sharply from 4.41875% on Friday. The one-month rate fell to 3.75125% from 4.18125% on Friday.

Later Monday, U.S. Federal Reserve Chairman Ben Bernanke, in testimony prepared for delivery at a hearing before the House Budget Committee, said he was encouraged by signs a severe credit blockage was easing after massive efforts by governments around the world to recapitalize major banks and guarantee short-term bank debts.

On Friday, three-month Libor posted its first weekly decline since July. The rate had pushed as high as 4.81875% on Oct. 10.
In yesterday's Weekly Review post, I described how the Alert HQ stock market statistics showed an improvement after last week's rise in stock prices. The important indicator showing how many stocks have their 20-day moving average above their 50-day moving average held steady and looks like it could be forming a low.

I know that one data point does not make a trend; however, combining the technical situation with the credit market data as described above has me thinking that it is time to start moving to a slightly more bullish stance.

As a result, I sold the remainder of the ProShares Ultra Short QQQ ETF (QID) and the Ultra Short Midcap 400 ETF (MZZ).

To complete my turnaround from worried bear to cautious bull, I opened a modest position in the ProShares Ultra S&P 500 ETF (SSO).

These actions were carried out mid-morning so I managed to avoid some of the losses eventually realized by QID and MZZ by the end of the day as well as pick up some profit from the run-up in SSO.

Am I convinced we are in for a booming bull market and that the worst is behind us? I am not so bold as to assume that to be the case. I merely feel that the market seems to want to move upward now and, since I have a small trading account, it behooves me to listen to Mr. Market and act accordingly.

In a triumph of possibly misplaced reason over trading instinct, I held on to the ProShares Ultra Short Consumer Services ETF (SCC) and was punished for the effort. All recent evidence (bad retail reports and rising unemployment, for example) points to the fact that consumer spending has been falling and that we can expect it to continue falling, resulting in a very week holiday shopping season. This should tend to drive this double short ETF up. Today, though, investors were having none of this idea. In a rising market, all news is good. We'll have to see how earnings season impacts this ETF.


Disclosure: long SCC and SSO



Sunday, October 19, 2008

Weekly Review - the slide slows as stocks rise

Yes, craziness and volatility are now the norm.

Monday saw an absolutely massive rally, one for the record books. Wednesday saw a huge drop such that traders, after the fact, noted that the market had crashed again. Yet the Dow and the S&P 500 managed to finish the week up well over over 4% and the Nasdaq finished up 3.7%.

It is clear that Monday was a snap-back rally after the worst week the market had seen since the 1930's. Subsequently, the Treasury and the Fed announced that they would take direct equity stakes in banks, providing a capital injection in the process. This allowed stocks to more or less hold their gains from Monday.

On Wednesday, a number of economic reports came out that confirmed the bears worst expectations. Most notably, retail sales declined 1.2%, the worst seen in years. The Fed Beige book provided a consistent picture of slowing economic activity in all districts. The Philadelphia Fed registered a much larger drop than expected. Rumors of forced selling by hedge funds lent a note of desperation to the session as stocks sold off hard, giving up much of Monday's gains.

Thursday started on a sour note with markets headed downward again but a major rally began that lifted market averages over 4%. Some analysts say the rally was based on oil falling below $70 per barrel which in turn was the result of a weak industrial production report.

Friday, markets were way down, then way up and then closed unchanged. Friday's rally, while it lasted, was interpreted to be due to an article by Warren Buffet who said he is now buying stocks for his personal account. Barely noticed were more depressing numbers from the housing industry.

While the market was bouncing up and down, companies continued to report earnings. IBM, Intel and Google all reported good numbers. A number of financial institutions beat severely lowered expectations (big deal) while Citi and Merrill Lynch reported more multi-billion dollar losses. All in all, earnings have so far been mixed and this game of beating lowered expectations is somewhat suspicious to me.

Technically speaking, markets enjoyed a rebound this week but the charts are still ugly with solidly downward trendlines firmly in place.

TradeRadar Alert HQ Stock Market Statistics --

Each week our Alert HQ process scans over 7200 stocks and ETFs and records their technical characteristics. Primarily we look for BUY and SELL signals for our free stock alerts; however, we also summarize the data in order to gain insights in the week's market action. The following chart based on daily data presents the state of our technical indicators:

Stock market statistics based on daily data, 10-17-2008
Moving Average Analysis --

We track the number of stocks that are above various moving averages. The number of stocks above their 20-day moving average and above their 50-day moving average have been declining rapidly and heading toward zero until this week. Finally we see a bit of improvement. A few hundred stocks have actually bounced above their 20-day MA. The number of stocks above their 50-day MA held steady as did the number of stocks whose 20-day MA is above their 50-day MA. It is a measure of how dismal things have been that this is the best performance we have seen in well over a month.

Trend Analysis and Buying Pressure --

As for the trend indicators, we see some slowing of the negativity. We use Aroon analysis to generate our trending statistics. This week we saw the number of stocks in strong down-trends actually decreased to about 5500 out of 7200, still terrible but we'll take any improvement we can get. The number of stocks in strong up-trends managed to stay steady but at an incredibly low level.

We use Chaikin Money Flow to track buying and selling pressure. Still another week of the continuing down-trend in our buying pressure indicator that we have been seeing for weeks.

The next chart shows the data based on weekly data. The good news here is that the moves this past week were strong enough to impact the data in a positive way even though the curves are more slow moving than those in the charts based on daily data.

Stock market statistics based on weekly data, 10-17-2008

Conclusion --

We discussed in last week's Weekly Review post that stocks were doing so poorly a snap-back rally was due. We did get a snap-back rally and more. Where to next?

There appear to be four major factors at work:
  • The economy, both in the U.S. and worldwide, is clearly in rough shape. Expectations are so low they are even driving down the price of oil. Investors are hoping cheaper oil will allow consumers to resume spending. As long as unemployment doesn't climb much further, that may even turn out to be true. Still, manufacturing is slowing, the financial sector is consolidating (and laying off employees) and exports are slowing. It's not a pretty picture.
  • Stocks remain technically in the doldrums. That means they are still somewhat over-sold. Our market statistics are still showing strong negativity. It seems that things can't much worse. This implies the path of least resistance may be up.
  • The actions of governments and central banks in the U.S., Europe and Asia have to have a positive effect sooner or later. We see LIBOR and the TED spread are beginning to come down as credit becomes a little easier. It is a reasonable assumption that these efforts will eventually pay off.
  • Earnings season is upon us. So far, earnings have been mixed. A good proportion of positive surprises could support a rally. If earnings come in as weak as many analysts expect, it doesn't bode well for stock prices.
All in all, the signals are mixed enough that investors shouldn't be too confident that "the bottom" is in. The question is: if the financial crisis is abating but a worldwide recession is coming to the fore, are stock prices too low or too high? Investors collective answer to that question will dictate the trend in markets.

The economic calendar will be very light this week with only leading indicators, initial claims and existing home sales. This should allow investors to focus on earnings and there will be plenty of quarterly reports to chew on. Use this link to check the earnings calendar at Briefing.com.



Saturday, October 18, 2008

Buffet says buy stocks, what should you do?

Friday, Warren Buffet wrote an op-ed piece in the Wall Street Journal saying he was buying stocks for his personal portfolio. Some say this was a major reason why markets rose on Friday though they fell back to a modest loss by the end of the day.

Buffet made the point that stocks are now cheap and that he likes to buy when everyone else is fearful. The Wall Street Journal followed up with an article that looked at several measures that are commonly used to divine whether stocks are over-valued, fair-valued or under-valued. They provided the following graphic titled "The World is Cheap".

WSJ charts showing stocks are under-valuedAs can be seen in the three charts above, these indicators have fallen to levels not seen since the 1980's. In all three charts, the lower the reading, the more stocks can be considered to be under-valued. The article referenced at the bottom of this post provides a bit more detail on each chart.

And a few more charts won't hurt --

Well, there is plenty of evidence that stocks are getting cheap, depending where you look. Here are a few more charts, courtesy of InvestmentTools.com, that make the same point.

First up we have a sentiment indicator, Bullish and Bearish sentiment charts from the American Association of Individual Investors. According to many contrarians, when the AAII is most bearish, it generally corresponds to a bottom. Note that the bearish sentiment (in red) is reaching a 15-year maximum.

AAI Bullish-Bearish Sentiment
This next chart shows the price-to-book ratio for the Dow Jones Industrials. Where the first set of charts from the Wall Street Journal showed the same measure for world stocks, this chart makes the point that U.S. stocks are in exactly the same state: cheap.

Dow 30 Price-to-Book
This last chart addresses a question that has been endlessly debated for the last year or two; ie, when will the housing market bottom? Here we see real estate prices adjusted by Consumer Price Index (CPI). This chart indicates that based on prices in general, housing has more or less returned to its long term trend line. The interpretation is that we are probably closer to the bottom in housing than we are to the top.

Real Estate Prices vs. CPI
Conclusion --

The set of charts reviewed here certainly give the impression that we are in the range where stocks are cheap and even real estate is getting back to somewhere around fair value. With stocks getting the thumbs up from an investor like Warren Buffet, it makes sense to consider strategies that allow us individual investors to follow in Buffet's footsteps.

The easiest approach is to begin investing in a couple of ETFs or mutual funds that provide exposure to a major market index like the S&P 500 or the Wilshire 5000. Easing into the investment by spreading one's buying out over several months or a year reduces the impact of not identifying the absolute bottom yet assures that an investor gets in somewhere around the bottom.

This, of course, assumes that the current financial crisis and worldwide recession won't spin out of control and cause stocks to lose another 30%. Warren Buffet seems to think things won't get too much worse. How about you?


Sources: Before You Rush Into Cash…



Free Stock Alerts - Alert HQ for Oct 17, 2008

This post is to announce that the latest list of free stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. We apply a combination of proprietary and standard technical analysis techniques to identify those stocks that are beginning to move. Our goal is to identify stocks or ETFs that are undergoing reversals, either to the upside or to the downside.

The market showed huge price swings this week but no new 52-week lows were established (whew!). Indeed, the Dow closed the week with a 4.7% gain, the S&P 500 with a 4.6% gain and the NASDAQ with a 3.7% gain. Small and mid-caps, however, barely budged. Against this backdrop, we have mixed results. Here is the breakdown for this week:

  • based on daily data, we have 25 BUY signals and only 4 SELL signals
  • based on weekly data, we have 2 BUY signals and 99 SELL signals
Last week we had absolutely no BUY signals based on daily data so it is good to see some BUYs appear and equally good to see the number of SELL signals dwindle to practically zero. With respect to the signals based on weekly data, we see the SELL list shrank compared to last week but it continues to identify a hefty number of declining stocks.

Stop by Alert HQ and download your free lists. The lists based on weekly data show those stocks that have exhibited some good follow-through after a recent trend reversal. If you want to be early in identifying the newest trend reversals, the lists based on daily data are for you. No matter which preference you have, there are bound to be a few stocks you will want to add to your watch list.



Wednesday, October 15, 2008

10 ways tech gets hurt by the consumer slowdown

As expected, the retail sales numbers released today were indeed horrible. What does that mean for the tech sector?

First, how bad were the retail sales numbers?

According to the Census Bureau retail sales report for September, estimated monthly sales for retail and food services on a seasonally adjusted basis fell 1.2% last month from the previous month. This is the biggest monthly percentage decline in more than three years. It is also represents a 1% drop from September 2007.

According to the New York Times, MasterCard reported last week that spending on consumer electronics and home appliances dropped 13.8 percent in September compared with a year ago. That number is by far the largest recorded since MasterCard began tracking the category in 2003, and twice the largest previous monthly drop in such spending.

Given that consumer spending accounts for 70 percent or more of economic growth, the tech sector cannot escape the impact. And based in the MasterCard report, consumer electronics is reflecting a disproportionate amount of the consumer slowdown.

Impacts on the tech sector --

Here are some of my quick thoughts on the subject. Though some of these companies are quite large and operate in both consumer and enterprise segments, the problems in consumer spending will nevertheless serve to drag down overall company performance.

Internet impacts --

1. Companies that fund advertising targeted at consumers will more than likely see budgets shrink. The big advertising networks that manage all these ads will be impacted. Impacted companies include ValueClick (VCLK) and Omniture (OMTR). Note that Yahoo (YHOO), Google (GOOG), Microsoft (MSFT) and Time Warner (TWX) all own huge ad networks.

2. The web sites that display all those ads will be hit by a double whammy. First, there will be fewer ads to host. Second, a belt-tightening consumer will be reluctant to click on those banner or search ads. Both will serve to reduce revenues for the web sites. Impacted companies: all the big portals like Yahoo, Google, Time Warner (their AOL property) as well as too many other sites to name.

3. For some reason, everyone still considers Amazon (AMZN) and eBay to be tech stocks. If consumers aren't buying, these companies will get hurt like regular brick and mortar retailers. Which makes me wonder: will Circuit City (CC) survive into 2009?

Semiconductors --

4. If gadgets are going unsold, the demand for semiconductors will fall off a cliff. Semiconductor companies whose products tend to go into consumer devices include large companies like Micron Technologies (MU), AMD, Intel (INTC) and Qualcomm (QCOM) as well as dozens of small companies too numerous to mention.

5. If semiconductor companies have excess capacity, the semiconductor equipment companies are dead meat. The big three in this sector are Applied Materials (AMAT), KLA-Tencor (KLAC) and Lam Research (LRCX)

6. With cell phone penetration high in the developed world and growing quickly in emerging markets, the handset makers are sure to feel a slowdown. Impacted companies: Nokia (NOK), Sony-Ericsson, already faltering Motorola (MOT) and maybe even Research in Motion (RIMM) will finally feel some pressure.

PCs and gadgets --

7. Intel sold a lot of processors last quarter. Some of the PCs those chips went into will be left sitting in warehouses when the Christmas selling season is done. Impacted companies: Dell, HP (HPQ), maybe Apple (AAPL) as well as those companies that make PC peripherals like Lexmark (LXK).

8. The market for MP3 players is dominated by the Apple iPod. SanDisk and Microsoft are basically second-tier. With the millions already sold and the market penetration that has already occurred, it is not unlikely that strapped consumers might decide that they don't really need to upgrade.

9. Also dominated by Apple is the smart phone sector. The iPhone is more expensive than a typical phone but it creates extreme loyalty and rabid demand. It may actually come through this consumer downturn with little damage. Competitors, however, may not be so lucky. All the handset companies (see number 6 above) are attempting to field an alternative to the iPhone. It is unfortunate that they are finding themselves in the middle of a recession while trying to introduce new products intended to unseat the market leader.

10. A popular gadget recently has been the global positioning system. This is not exactly something consumers need more than gasoline or food food for the table. Like many discretionary gadgets, GPS sales could easily slump in today's environment. In the U.S., the primary company that feel the impact would be Garmin (GRMN).

Conclusion --

The is by no means an exhaustive list of impacts or companies. Hopefully it helps to put the situation in perspective as you attempt to identify what stocks should be avoided or embraced during a time when the consumer appears to be pulling back.

If you would like to add to this list, please leave a comment.


Disclosure: none



Tuesday, October 14, 2008

Garnter and Sun's Schwartz on different planets

Gartner is hosting their Symposium/ITxpo 2008 conference in Orlando this week. From Peter Sondergaard, Gartner's global head of research, comes the money quote:

"The next big thing in IT is not a technology — it is cost reduction, risk management and compliance"
Garnter goes on to say that information technology spending could rise only 2.3 percent in 2009. Gartner had previously forecast 5.8 percent growth in IT spending next year. Developed economies are expected to get the worst of it, especially the United States and Western Europe, but emerging regions will not be immune either.

For Europe, Gartner is now predicting a slowdown of 0.8% where it was previously looking for 2.3% growth. In North America, they are expecting growth to remain barely positive at a 0.5% rate, down from the previous prediction for 5.3% growth.

Echoing some of the themes we previously wrote about in our post "10 ways the financial meltdown impacts tech", Gartner offers several recommendations to help IT managers reduce costs:

1. Virtualize servers, a trend that is expected to benefit companies like VMWare (VMW)

2. Adopt software-as-a-service (SaaS) to reduce the cost of developing in-house systems or the upfront cost of licensing and installing systems.

With top tech CEOs like Steve Ballmer of Microsoft, John Chambers of Cisco Systems and Michael Dell addressing attendees, we can probably expect to hear more from the conference.

And then there is Sun --

Whereas Gartner paints a picture of pervading gloom and IT departments hunkering down, there is no shortage of other opinions.

Sun Microsystems (JAVA) CEO Jonathan Schwartz was recently interviewed by IT publication Computerworld and his take is different.

He feels that the economic downturn will encourage businesses and IT departments to be more open to change. To Schwartz, that means more interest in Sun's open source solutions, for example. This would include products like MySQL, the recently acquired database engine and OpenSolaris, Sun's operating system. Open source is also one of themes in the post we mentioned above.

Schwartz, however, registers a bit more optimism about the willingness of IT departments to engage in rolling out new technology. Yes, open source may yield cost reduction but often, to an IT manager, doing nothing new and staying with existing technology choices is often cheaper. Especially if the migration to open source involves retiring an established technology in order to implement something new. Since there are always significant labor and training costs involved in any technology migration, it seems the optimism is a bit overdone in a time of "hunkering down".

Likewise, Schwartz touts Sun's energy efficient server solutions as having the ability to greatly reduce data center costs. I find it highly unlikely that anyone, at this time of shrinking budgets, would retire existing servers to bring on line a new set of servers.

Conclusion --

So the consensus seems to be that IT is heading for tough times and IT departments will certainly be forced to react to the situation. Gartner expects staff reductions and serious cost cutting as a result of significantly slowing growth.

Sun expects business to commit to purchasing money-saving solutions. As systems reach end-of-life or brand new capabilities are required, there may be the potential that companies will switch into Sun solutions. On the other hand, when under cost pressure, managers tend to be most conservative. I believe this situation plays against Sun's ambitions and the company will face challenges like most other enterprise suppliers.


Sources:

Computerworld: Q&A: Schwartz says financial meltdown plays into Sun's hands

Computerworld: Gartner: Financial meltdown may mean hiring freezes, staffing cuts for IT

EETimes: Gartner slashes 2009 tech spending forecast


Disclosure: none



Sunday, October 12, 2008

Lightening up on my ultra shorts

The market certainly swung through a wide range on Friday. The first half hour showed more variation than is often seen over the course of an entire day.

The S&P 500 opened with a big gap and fell 7%. Forty minutes later it had closed the gap and moved into the green. The market then proceeded to sink in a fairly steady and orderly way down to nearly its earlier lows until 3:00 when the index turned up and began to rally like crazy. By 3:36, it had erased its loss and was up 2.5%. The index then turned down and closed with a 1.18% loss.

I relate this intra-day behavior to illustrate why I got the impression that Friday was some kind of climactic day. Maybe not "the" climactic day denoting the absolute bottom but at least some kind of tradable bottom. The whipsaw action seemed to signal a change of trend might be in the air.

As a result, by mid-day I sold half of my positions in the ProShares Ultra Short Midcap 400 ETF (MZZ) and the Ultra Short QQQ (QID).

The Ultra Short Financial ETF (SKF) has been an outstanding performer these last few weeks but after hitting $205 and promptly dropping to $162 I decided this ETF was exhibiting similar behavior as had been seen back in July. With all the government activity around the world aimed at propping up banks, it seemed like the position of greater risk at this moment in time was to be on the short side of the financials. Accordingly, by 1o:47 I sold the entire position while it was still above the previous day's close. SKF ended the day down $23.49 for a 13% loss. I wish I could say this shows what a great trader I am but I suspect it was just dumb luck...

When it comes to the Ultra Short Consumer Discretionary ETF (SCC), however, I think it is very likely we will see more serious weakness in consumer spending. Until recently, this sector was over-valued and, in my opinion, has the potential to fall further no matter what goes on with the banks, the Fed or the Treasury. As a result, I decided to maintain the full position. This Wednesday we will see the Retail Sales report and it is expected to be ugly. Unless investors are exhibiting a euphoric snap-back rally mindset, I would expect to see SCC add a few more points.

Disclosure: still long QID, MZZ and SCC



Saturday, October 11, 2008

Weekly Review - the beatings continue

A stunning week and thank goodness it's over! Records were set on the downside with major averages sliding 18% over the course of five tumultuous sessions. Over the course of the last two weeks, we essentially met the definition of "crash" - a more than 20% drop in a short period of time. Selling was relentless all week long with only the NASDAQ Composite managing to close in positive territory by a few points on Friday.

As an indication of how pessimistic investors were this week, you have to realize that this selling took place despite the unprecedented coordinated global rate cut, decent earnings and forward guidance from bellwethers IBM and GE and commitments by the U.S. government to backstop commercial paper.

The short selling ban expired at midnight on Wednesday yet financial stocks rallied on Friday. Go figure.

All in all, it was a good week to be short or in cash. Investors focused not only on the continuing problems in the credit markets but also on accelerating problems in the economy. Jobless claims continued to signal tough times for workers, retailers reported very bad numbers indicating consumers are hunkering down. The plunge in commodities including oil, corn and soybeans signaled the possibilities of a global contraction. In Europe and Iceland, governments took steps to guarantee bank deposits or took over banks outright. It was a downright scary week.

TradeRadar Alert HQ Stock Market Statistics --

Each week our Alert HQ process scans over 7200 stocks and ETFs and records their technical characteristics. Primarily we look for BUY and SELL signals for our free stock alerts; however, we also summarize the data in order to gain insights in the week's market action. The following chart based on daily data presents the state of our technical indicators:

Stock Market Statistics based on daily data, 10-10-2008
Wow, the data looks like it is trying to fall off the chart.

Moving Average Analysis --

Out of 7200 stocks that we track, can you believe that only a couple of hundred are above their 20-day moving average or above their 50-day moving average? I keep an especially close eye on the number of stocks whose 20-day MA is above their 50-day MA. It is hard to believe that this number has fallen to less than 500. That is only 7% of all stocks we track. Unbelievable!

Trend Analysis and Buying Pressure --

As for the trend indicators, again this week absolutely everything indicates weakness. We use Aroon analysis to generate our trending statistics. This week we saw the number of stocks in strong down-trends increase to over 6000 out of 7200. That's 83% of all stocks we track! The number of stocks exhibiting strong up-trends has decreased to under 300 or only 4% of all stocks.. It goes without saying that both of these indicators are reaching extreme levels.

We use Chaikin Money Flow to track buying and selling pressure. This week just saw a continuation in the same down-trend in our buying pressure indicator that we have been seeing for weeks. Again tis week, we can say that it has the distinction of registering the lowest level since we started tracking it at a level under 300.

We won't include the chart based on weekly data as it just displays more of the same.

S&P 500 Sector Analysis --

I include the chart below only for shock value. We track the stocks that make up the various sectors of the S&P 500 using some of the same indicators discussed above. I am stunned to see the chart is almost bare. The Financial sector is the only one with any number of stocks registering an up-trend according to DMI analysis. None of the stocks in any sector is registering an up-trend based on Aroon analysis. Even the stalwart Consumer Staples sector is flagging with less than 20% of the stocks in the sector maintaining their 20-day MA above their 50-day MA.

The surprise of the group, though, is the Financial sector which is showing surprising strength based on Friday's rally in the sector.

S&P 500 Sector Analysis, 10-10-2008

Conclusion --

Boy, stocks got beaten down again this week, beaten with a stick, as they say.

With our stock market statistics looking as bad as they do right now, though, it would seem a snap-back rally would be all but certain. Indeed, on Friday we saw a furious rally that took the major averages from a 7% deficit up to a closing loss of only 1%. The Financial sector even managed to finish at the highs of the day in solidly positive territory (more on that in another post soon).

But how much can the market rally? The credit system is still a shambles. The G7 can't agree on coordinated action. Earnings season is starting and the outlook from most analysts is that it's going be dismal.

To further roil markets, we have a big roster of economic reports coming up this week. We will see PPI and CPI, the New York Empire State index, retail sales, crude inventories, the Fed Beige Book, initial jobless claims, industrial production, the Philadelphia Fed regional manufacturing survey, building permits and housing starts and the Michigan Sentiment index. The outlook for most of these reports is not particularly rosy. Any positive surprise could indeed get that snap-back rally going but any significant surprise to the downside could see the beatings resume.

Here, though, is where we separate the traders from the investors. Jumping on this snap-back rally, should it occur, may require exquisite timing in order to protect profits when the rally runs out of gas. To me, that's trading, not investing. And even traders need a certain amount of luck to avoid getting burned in markets like these. So tell me, are you feeling lucky?



Free Stock Alerts - Alert HQ for Oct 10, 2008

This post is to announce that the latest list of free stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. We apply a combination of proprietary and standard technical analysis techniques to identify those stocks that are beginning to move. Our goal is to identify those stocks undergoing reversals, either to the upside or to the downside.

It was a horrible week in the markets with declines in major averages ranging from 15% to 18%. Damage to our Alert HQ technical indicators continued and and we have hit all time lows. Against this backdrop, we see SELL signals way outnumbering BUY signals again. Here is the breakdown for this week:

  • based on daily data, we have no BUY signals at all (!) and 19 SELL signals
  • based on weekly data, we have 3 BUY signals and 188 SELL signals
The BUY lists are practically empty. The SELL list based on daily data actually is smaller than last week because so many stocks had already fallen so much prior to this week. With respect to the signals based on weekly data, we see the SELL list growing as continued declines have finally triggered these longer-term indicators to generate the sell signal for an increasing number of stocks.

Stop by Alert HQ and download your free lists. The lists based on weekly data show those stocks that have exhibited some good follow-through after a recent trend reversal. If you want to be early in identifying the newest trend reversals, the lists based on daily data are for you. No matter which preference you have, there are bound to be a few stocks you will want to add to your watch list.



Wednesday, October 8, 2008

Ban on short sales set to end - what next?

On October 1, 2008, the Securities and Exchange Commission extended its emergency action prohibiting short sales of shares of certain financial companies to the third business day after the enactment of the pending federal legislation to stabilize the credit markets and financial system, but not later than October 17. The legislation, better known as the bailout bill, was passed on Friday, October 3 and immediately signed into law by President Bush.

The day after the ban was first announced, the ProShares UltraShort Financial ETF (SKF) was halted and when it resumed trading it barely budged. In the meantime, financials tumbled and many holders of SKF missed out on a 16% gain that day.

Since then, SKF has been trading reasonably in tune with the double inverse of the Dow Jones Financial Index (also the basis for the iShares Financial ETF - IYF). Despite, the ban on short selling, most of the stocks protected by the ban have fallen anyway.

ProShares has announced that October 9, 2008, it will resume its normal process of creating new shares of its ProShares UltraShort Financials (SKF) and ProShares Short Financials (SEF) ETFs.

This is good news for investors as spreads should be slightly narrower and the ETFs should more consistently trade closer to their net asset value.

What about the stocks that have been protected by the short selling ban? Many have already been crushed. Without the ban in place, will they take another leg down?

Consider the following:

At the July lows for IYF, at a time before Lehman collapsed, Merrill was sold, WaMu got taken under, etc., etc., the ETF fell to just under $60. Since then it traded in the $65 to $75 range. It wasn't until just this week on Tuesday that the ETF finally fell back below $60. After all these cataclysmic events in the financial sector, should the underlying index still be worth almost the same amount it was three months ago?

What do you think financial stocks go from here without the SEC to protect them?

Disclosure: long SKF



Tuesday, October 7, 2008

401k keeping you awake at night? Me too...

In looking at the logs for this blog I see that many people are visiting TradeRadar because they are searching on the term "401k".

I have written a few posts (see the list at the end of this post) describing my approach to dealing with your 401k during this time of sinking markets.

It is clear that anxiety is rising as fast as markets are dropping. I had remained fairly calm for the last eight to ten months, with a little over half of my 401k funds spread across a stable value fund, a Treasury bond fund and a global bond fund. I have continued to contribute and allocate nearly all of the contributions to stocks on the assumption that I am purchasing good mutual funds at cheaper and cheaper prices.

As the markets have gone from bad to worse to total carnage, it is unsettling in the extreme. Like many of those who are typing "401k" into Google, I am also a working stiff who is worried about his retirement. As someone who closely follows the markets and writes about investing, I am feeling the overwhelming need to do something.

At this point, the bear market is well along and most likely will continue for a while. Major averages are over 30% off the peaks established last year. Many advisers will now say that if something wasn't done months ago to protect your portfolio it probably isn't worth taking any drastic action now. I would tend to agree with them.

On the other hand, we are only human. We hate to stand by and watch a train wreck without doing anything. We hate to feel like events are totally beyond our control. So don't be afraid to do something, just make sure it is not something extreme. If you're 100% in stocks in your 401k and you can't sleep at night, take a modest percentage and move it into a Treasury bond fund. If you have no foreign stock exposure, perhaps now is a good time to move some assets from a U.S. stock mutual fund into an emerging markets fund given that emerging markets are down even more than U.S. markets. You may find that taking one of these simple actions provides some relief.

It is practically a given that things will get worse before they get better. If you must take some action so you can sleep at night, please don't do anything drastic like bailing out of stocks entirely. When the market does move up, it almost always does it in such a way that the average individual investor misses a big part of the ride; therefore, you need to keep a certain amount of your 401k in stocks not matter how painful that decision seems to be. After all, at some point in the future when the bottom is finally established and stocks begin to rally, all the experts will be saying that it is just another suckers rally in a bear trend. Except that it won't be and if you don't have some stocks in your portfolio you will miss this initial move which is likely to be powerful.

So swallow hard, make a few sensible adjustments and hang in there. This bear market won't last forever.

Related posts:





Monday, October 6, 2008

Citi: consumer down and out, economy, too

Periodically Citi releases their report entitled "Comments on Credit". This issue is particularly pessimistic.

The report features the Citi Financial Conditions Index (FCI), a proprietary index that is a composite of a number of financial measures. The index is a weighted-average of six variables, including option-adjusted corporate credit spreads, equity values, the money stock, the trade-weighted dollar, mortgage rates and energy prices. It is stated in terms of standard deviations from a mean value. A reading of plus one sigma, for example, would suggest financial conditions are imparting a strong tailwind to aggregate demand that could promote inflationary imbalances and therefore may be a signal that monetary policy is overly accommodative. A reading of minus one sigma is suggestive of financial drag on the outlook that may point to undesirable slowing and rising unemployment.

So where does the index stand today? Here is the money quote from the report:

"At more than minus five standard deviations below norms, the FCI is probing depths beyond our experience. It suggests that especially harsh economic conditions are about to unfold."
The ramifications are widespread. The following chart relates the Citi FCI and consumer spending. The chart shows the FCI is well below the levels seen during the last recession. The chart also shows that the change in consumer spending as represented by the PCE is already measurably weakened and is projected to go even lower.


The report emphasizes that the pullback among consumers is becoming a key driver in what Citi unequivocally refers to as a recession. A consequence is that businesses are being forced to scale back spending and investing as the weak consumer contributes to a weakening in new orders. This was brought home by the recent poor durable goods report. More importantly, weaker spending has reinforced the slowing in hiring. Last Friday's Non-Farm Payrolls report showed that employment declined by 159,000, much worse than expectations. Based on this data, Citi thinks that labor market weakness is now pervasive.

In Summary --

Citi sees a series of cascading effects. The FCI shows extreme weakness in its financial measures. The correlation between a weak FCI and weak consumer spending appears to be strong. By extension, this will drive a slowing in production which will in turn drive a decline in employment which, in a self-reinforcing loop, will further weaken the consumer and so on.

The bottom line is that Citi sees the consumer and the economy to be down and out for some time to come.

Source: Citi Comments on Credit, October 3, 2008



Sunday, October 5, 2008

Weekly Review - keep bailing, this market is sinking fast

Another week for the record books. Congress failed to pass a bailout bill on Monday and the market registered historic losses with the Dow down over 700 points. On Friday, Congress succeeded in passing the bailout bill and guess what? Markets sank anyway. Maybe if the government keeps on passing bailout plans, one of these times we will get a rally.

Well, it really wasn't that surprising to see stocks fall on Friday. With lackluster ISM Services numbers being released a few days after an unexpectedly bad ISM Manufacturing report and then a surprisingly bad Non-farm Payrolls report to cap off the week, there were sufficient reasons of a fundamental nature to cause investors to sell.

If you didn't think those employment numbers were awful and might not have nasty implications for the economy, just look at the following chart (courtesy of the Bureau of Labor Statistics).

Monthly Employment, 10-2008Each week our Alert HQ process scans over 7200 stocks and ETFs and records their technical characteristics. Primarily we look for BUY and SELL signals for our free stock alerts; however, we also summarize the data in order to gain insights in the week's market action. The following chart based on daily data presents the state of our technical indicators:

Stock Market Statistics based on daily data, 10-3-2008

Moving Average Analysis --

Despite a bounce-back rally on Tuesday, the markets essentially spent the week heading down. The moving average data reflects extreme weakness. The number of stocks above their 20-day moving average and the number of stocks above their 50-day moving average both declined to the lowest levels I have seen since I started tracking this data back in February, 2008. More ominously, the number of stocks whose 20-day moving average is above their 50-day moving average declined again for the fifth week in a row. The rapidity of the decline makes me worry we are still not close to the bottom yet.

Trend Analysis and Buying Pressure --

As for the trend indicators, absolutely everything indicates weakness. We use Aroon analysis to generate our trending statistics. This week we saw the number of stocks in strong down-trends increase and the number of stocks exhibiting strong up-trends decrease. Both of these indicators are reaching extreme levels and show how poorly stocks are behaving.

We use Chaikin Money Flow to track buying and selling pressure. This week just saw a continuation in the same down-trend in our buying pressure indicator that we have been seeing for weeks. This week, as a matter of fact, has the distinction of registering the lowest level since we started tracking it.

I don't always display the chart that is based on weekly data. The curves are typically slow moving and don't show much. Last week, however, I felt it was worth looking at. This week, again, there is plenty of movement. The Aroon down-trend indicator has hit a record high and the moving average indicators are hitting record lows. Ugly and getting uglier.

Stock Market Statistics based on weekly data, 10-3-2008

S&P 500 Sector Analysis

Here is our analysis of the performance of the various sectors that make up the S&P 500. This is the weakest I have seen it since I started doing this kind of analysis.

Consumer Discretionary is fading while Consumer Staples maintains its strength. Utilities seem to holding onto a certain amount of favor. The Financials are also hanging in there pretty well. This sector should get interesting when the SEC removes the short selling ban.

The remainder of sectors have been decimated.

Conclusion --

I keep referring to how ominous it is that the number of stocks whose 20-day moving average is above their 50-day moving average continues to decline. There is an excellent post over at Minyanville which discusses the significance of a similar indicator (read it here). They discuss the importance of watching the 50-day moving average in relation to the 200-day moving average. Though they use longer time intervals than we do at Trade-Radar, the concepts are the same.

Our technical review for this week, therefore, is very pessimistic. Everything points down. Investor sentiment seems to have swung negative as even the passage of the bailout bill couldn't generate any buying enthusiasm.

The question now becomes one of degree. So many stocks have fallen into down-trends and so few are managing to show gains that it seems things can't get much worse from here. Unless, of course, we are falling into the kind of brutal bear market we saw after the Internet bubble burst. And that is a chilling thought. According to our work, market internals are now worse than in July and July was worse than in March. Our trend is clear - it is down. Given how much damage stocks have sustained and the danger signals being sent by economic reports, I am more convinced than ever that the eventual long-term rebound will take months to manifest itself.

With stocks in such a dismal state the market is ready for a little bounce. The economic calendar is very light this coming week so investors won't have to be continually reminded that the U.S. seems to be sliding into recession. Two companies are actually fighting over who gets the privilege to acquire a bank! The Citi versus Wells Fargo conflict over buying Wachovia implies that all in the banking sector is not completely doom and gloom. Whether we see a bounce or not this week, however, there is no doubt this bear market has further to go.



Saturday, October 4, 2008

Free Stock Alerts - Alert HQ for Oct 3, 2008

This post is to announce that the latest list of free stock alerts is up and available at Alert HQ. Each week we scan over 7200 stocks and ETFs looking for fresh BUY and SELL signals. We apply a combination of proprietary and standard technical analysis techniques to identify those stocks that are beginning to move. Our goal is to identify those stocks undergoing reversals, either to the upside or to the downside.

This week I have added another indicator to the combination that we use. I have brought MACD, Moving Average Convergence Divergence, into the mix. This indicator measures the difference between the 12-day exponential moving average and the 26-day exponential moving average. This difference is MACD. In turn, MACD is filtered using a 9-day exponential moving average. The difference between MACD and its 9-day EMA is called the Divergence.

As an example of how to use the indicator, if you are looking for a BUY signal, you would want to see MACD greater than zero and the Divergence greater than zero. We have elected to use a system where we generate an alert if either one of these conditions is true and identify it as a Moderate strength MACD signal. If both conditions are true, we identify it as a Strong MACD signal.

Damage to our Alert HQ technical indicators continues and it is worse than ever. Against this backdrop, we see SELL signals way outnumbering BUY signals again. Here is the breakdown for this week:

  • based on daily data, we have 9 BUY signals and 56 SELL signals
  • based on weekly data, we 12 BUY signals and 133 SELL signals
On the BUY list we see a few more banks. On the SELL list we see a mixture of all kinds of companies. There is apparently no place to hide.

Stop by Alert HQ and download your free lists. The lists based on weekly data show those stocks that have exhibited some good follow-through after a recent trend reversal. If you want to be early in identifying the newest trend reversals, the lists based on daily data are for you. No matter which preference you have, there are bound to be a few stocks you will want to add to your watch list.



Thursday, October 2, 2008

10 ways the financial meltdown impacts tech

Can the problems impacting the financial sector impact technology companies? You bet they can!

We know there is a credit crunch and that the economy is slowing. This is translating into falling revenues and a drop in new orders. Tech company management is hunkering down. So are consumers. IT budgets are stagnant or falling and cost cutting will be the order of the day. Below we look at some specific ways that the tech sector will be reacting to this situation.

Surprisingly, there are some impacts that may turn out to be net positive for certain tech companies. As expected, though, there are also some seriously negative impacts.

Positive Impacts --

1. Increase in cloud computing - companies may look to avoid buying data center equipment and will instead look for a "pay-as-you-go" model. Beneficiaries Amazon (AMZN), Google (GOOG), eventually Microsoft (MSFT)

2. Increase in usage of open source products - generally cheaper to acquire and implement than the licensed products from vendors like Microsoft and Oracle, we may see an increase in the adoption rate of Linux operating systems, Apache web server software, Google Docs ... Beneficiaries could be Red Hat (RHT), Google or Citrix (CTXS) who now owns open source virtualization vendor XenSource

3. Industry Consolidation - those companies with money will acquire companies with good technology who are suffering due to this crisis. With financing difficult and expensive, those companies sitting on plenty of cash will be able to out-maneuver their competitors. Think of Oracle (ORCL) and Microsoft (MSFT) scooping up more software companies on the cheap. Intel (INTC) and IBM also have the heft to be players here.

4. Integration - Consolidation among tech companies and in the financial sector will increase the need for system integration services and software. This could benefit big consulting companies like Accenture (ACN) and the HP/EDS combination, for example. Also some of the software companies specializing in products that tie systems together like Informatica (INFA) and Pervasive Software (PVSW).

5. Cost cutting is in - look for more emphasis on virtualization in an effort to reduce data center costs. Beneficiaries are VMWare (VMW), Citrix (CTXS)

6. Investing - Angel investors and venture capital firms will have more opportunities to invest in up-and-coming young companies as these entrepreneurs are turned down for bank financing.

7. Software-as-a-service (SAAS) may become more attractive. With this model, the initial investment to get up and running on a particular software application tends to be much less than it would be if a company were purchasing and installing the full licensed application in their own data center. Look for Salesforce.com (CRM) and Concur (CNQR) to maintain leadership positions through this downturn (if not high stock prices) and perhaps even NetSuite (N) will at least hold its own.

Negative Impacts --

8. Hardware spending delayed - Expect server sales to decrease as businesses put off spending on new equipment and focus on consolidating servers through virtualization. Who gets hurt: Sun (JAVA), HP (HPQ), Dell, maybe IBM. Big telecom suppliers are feeling the pressure in their sector: Nortel (NT), Alcatel-Lucent (ALU) reporting losses though Cisco (CSCO) seems relatively solid at this point. And with the consolidation mentioned above, it is quite possible redundant systems will be decommissioned, leaving surplus hardware and further reducing demand.

9. Consumers cut back - Worried consumers may decide they can do without the latest gadgets. This will hurt the semiconductor stocks as more than half of all semiconductors find their way into consumer electronics. The semiconductor equipment stocks, currently deep in the doldrums, will find their bear streak extended. High-flying gadget stocks like Apple (AAPL) and Blackberry producer Research in Motion (RIMM) may likewise see their growth curtailed. Who really needs a new TV? Makers of LCD panels for TVs are already seeing growth slow - think Corning (GLW).

10. The weak get weaker - Financing is something all companies need whether it is for growth, carrying inventory or making payroll. With lending tight, credit lines being reduced and banks reeling, tech companies won't be the only ones feeling the effects of this credit crunch. But for those tech companies teetering on the edge, this kind of environment could be enough to push them into bankruptcy or into the arms of a suitor. Think of AMD (AMD) and Micron Technology (MU), both reporting big losses, seeing their stocks crushed and facing an uncertain future. Where do they go from here?

In summary, today's environment will provide opportunities for some companies and serious challenges for others. As tech investors, the ten factors listed here should be kept in mind as we tip-toe through this bear market minefield.


Maybe you have another item to add to this list? Please leave a comment!


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