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Thursday, August 25, 2011

Despite beating expectations, July Durable Goods report has me worried

The Durable Goods advanced report for July was released on Wednesday and the headline number surprised to the upside. This helped the market tack on some further gains beyond Tuesday's big advance.

Besides its effect on a day's action in the stock market, the Durable Goods report is useful for seeing how tech in aggregate is performing. As of this report, the situation is mixed. I always focus on two particular measures: shipments and new orders. In July, the two measures were not consistent and this is worrisome. Let's see how it played out in July.

Shipments --

I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how July shipments looked for the overall tech sector:

Results were actually quite good and, to make things even better, the previous two months were revised upward. This indicates that the fears of a "slow patch" in July were overblown.

New Orders --

This is the category that gets the most attention as it provides a glimpse of what might unfold in the future. Looking at the sector summary we see that there was actually a significant drop in new orders.

This is not a good thing. Note how new orders have fallen roughly to levels last seen back in March. Note also that the trend is decidedly not up.

Conclusion --

Shipments in the tech sector have continued to show strength through July. This is good but the question is always whether that kind of performance can continue.

New orders are one of the better indicators we have to forecast future shipments and the level of business activity in an industry or sector. July's dismal result suggests that weakness in tech is indeed impending.

As economists and analysts reduce their estimates of GDP growth, it appears that tech is firmly in the same boat. Optimists will point out that seasonality is due to come into play and  provide support for the tech sector. As the economy in general struggles, though, it becomes harder to believe that tech can escape the downward pull of a slowing economy and cautious consumer.

Besides Apple, which tends to be a special case these days, can other tech companies prosper in this environment? It looks like it's going to be a tough row to hoe for most other companies in the tech sector.

Disclosure: none

Thursday, August 18, 2011

What theme is emerging from this market carnage?

With the market practically crashing again I wondered if there were any industries hiding stocks with strength.

Poking around in the Industry Inspector at our sister site actually did yield a little theme in an unexpected area.

I sorted the list of industries according to percentage of stocks above their 50-day moving average. At the top of the list was the Consumer Services/Automotive Aftermarket industry which contains only one stock: Monro Muffler and Brake (MNRO).

Re-sorting to look for industries with stocks showing bullish MACD and up near the top was the Consumer Services/Motor Vehicles industry. Among the three stocks in this segment is Midas, Inc. (MDS), otherwise known as Midas Muffler.

These stocks seem barely affected by the recent downturn but the simple reason is strong earnings. Both companies rolled up increases in sequential revenues and earnings. On a year-over-year basis, Midas disappointed a bit on revenue but shined on earnings while Monro did well in both revenue and earnings.

The theme that may be emerging here is that consumers, impacted by falling markets, disarray in Washington and Europe and a stagnant job market, are getting increasingly skittish and are restricting their expenditures. Rather than risking getting financially extended in an uncertain economy by taking on an auto loan, many are fixing their current car. Truth be told, this is looking increasingly like the more prudent move.

This kind of caution about making large purchases due to fears of a potential recession can be a self-fulfilling prophecy. For investors, however, it does suggest that certain companies that help consumers extend the life of big-ticket items, or other companies that offer rock-bottom prices for consumers forced into frugality, will be the beneficiaries of this situation.

What industries or sectors do you think might fit this theme?

Disclosure: no positions in any stocks mentioned in this article

Sunday, August 14, 2011

Stocks dig a deeper hole -- when do we come up for air?

After a week of epic volatility, stocks ended the week on a positive note; nevertheless, it wasn't enough to turn a loss into a gain. The S&P 500, for example, still ended the week down 1.63%.

Last week I reviewed the moving average and trend analysis charts and declared that we were at bearish extremes not seen since the March 2009 market lows. Let's see what they say this week.

The view from Alert HQ --

For those readers who are new to TradeRadar or who don't remember what this is all about, the data for the following charts is generated from our weekly Alert HQ process. We scan roughly 6200 stocks and ETFs each weekend and gather the statistics presented below.

In this first chart below we count the number of stocks above various exponential moving averages and count the number of moving average crossovers, as well. We then plot the results against a chart of the SPDR S&P 500 ETF (SPY).

The number of stocks above their 50-day EMA (yellow line) has improved so little the change is pretty much imperceptible in the chart above. In the meantime, the number of stocks whose 20-day EMA is above their 50-day EMA (magenta line) has continued to fall, reaching another post-2009 extreme.

With the over-sold situation getting even more over-sold, it is hard not be looking for a snapback rally while being terrified that another leg down might just as well be in store.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.

On this chart we have another post-2009 record being set: the number of stocks in strong up-trends (yellow line) has dropped to a new low. Having set a record for number of stocks in strong down-trends the previous week, we see that measure has thankfully declined this week though it remains at a very elevated level.

Conclusion --

Chart damage has been so severe it is questionable whether one can use technical analysis at all to gauge this market. Still, we have to work with the tools that we have.

Last week we felt that the depths to which stocks were over-sold implied we wouldn't go much lower. Actually, we do go lower, over 5% lower. A strong rebound on Thursday and a more modest gain on Friday allowed stocks to come back part of the way.

The question investors will have this weekend is whether the two good days at the end of last week portend an improving tone for the market. Can the two-day rally continue or will it run into a brick wall?

Among the brick walls that we have to worry about are the following:

  1. Former support levels now look like resistance. For the S&P 500, it means that a rally could easily stall at the 1250 to 1260 range.
  2. For all major indices, the 50-day moving average has rolled over and the 200-day moving average either has done so or is on the verge of doing so. Bearish crossovers have occurred for the S&P 500, the NASDAQ Composite and the Russell 2000.
  3. European sovereign debt woes remain unresolved and European banks are under pressure
  4. Soft economic numbers, stagnant job growth and downbeat sentiment cast doubt on the ability of the U.S. to avoid recession or at least an even softer patch than we are currently experiencing
  5. The political will to impose austerity while the economy struggles does not bode well for GDP, jobs or corporate profits

Not to be completely negative, it is important to point out that there are still some positives at work:

  1. The soft economic numbers we have seen lately, though disappointing, still reflect growth at a slow pace. That is clearly better than numbers that reflect contraction. 
  2. There are many analysts who say stocks are now bargains and perhaps they are if the economy doesn't deteriorate further.
  3. In the vein of "don't fight the Fed" we still have low interest rates (and will through the middle of 2013 according to the latest Fed statement) and a commitment by the Fed to use what tools it has to support the economy. 
  4. To his credit, Obama is finally trying to turn the conversation to jobs and we can only hope that something beneficial comes out of that (though Americans have now been trained by their leaders to be cynical of all such efforts emanating from Washington).

All in all, this is a tough time to make predictions. Just be careful out there.

Disclosure: none

Sunday, August 7, 2011

Hello down there! Is there a bottom in sight yet?

Last week I looked at the Trending Analysis chart (I have the updated version below) and said there was further room for stocks to fall before the next rally could begin. Even though I expected a further pullback, I was wholly unprepared for what actually happened: the market fell with a vengeance.

Looking at the S&P 500, for example, it took out the trendline extending all the way back to March of 2009, blew threw the lower support at the bottom of a 6-month consolidation pattern (those who are more pessimistic are saying this was the neckline of a head-and-shoulders), and to put the icing on the cake, dropped decisively below the 200-day moving average. Many of the other indices look pretty much the same.

The moving average and trending analysis charts I often present on the weekend certainly reflect the damage. Let's see what they say this week.

The view from Alert HQ --

For those readers who are new to TradeRadar or who don't remember what this is all about, the data for the following charts is generated from our weekly Alert HQ process. We scan roughly 6200 stocks and ETFs each weekend and gather the statistics presented below.

In this first chart below we count the number of stocks above various exponential moving averages and count the number of moving average crossovers, as well. We then plot the results against a chart of the SPDR S&P 500 ETF (SPY).

The yellow line on the chart above shows that the number of stocks above their 50-day exponential moving average has dropped to a lower level than during the March 2009 lows. Now that is an extreme! In addition, it is an extreme that suggests investors are totally bearish on both the economy and stocks and are throwing in the towel.

I keep thinking it's good sign when the yellow line on the chart crosses above the magenta line and a bad sign when the yellow line crosses below the magenta. You can see that for SPY, at least, there hasn't been a sustained move of that sort in over a year. As soon as stocks move up, weakness hits again. Indeed, the fact that the number of stocks above their 50-day EMA has set a series of lower highs all year long should, in retrospect, have been looked at as a warning signal for a week like this one.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.

This chart is another study in extremes. Though the time scale doesn't go all the way back to March 2009, I can tell you that the number of stocks in up-trends (yellow line) now is as low as it was back then. The number of stocks in down-trends (red line) hasn't quite reached the level we saw in 2009 but it's pretty close.

Conclusion --

Well, it certainly looks like bears are ascendant. And they have their reasons: lackluster ISM, GDP and employment reports in the U.S., emerging markets raising rates to fight inflation, Europe struggling with sovereign debt, etc. All that could definitely be reason enough to lighten up on stocks. But to this extent?

Bears have pushed stocks to extremes last seen when the global financial system was melting down and a horrific once in a generation recession had taken hold. Though stock prices are not yet as low as they were in 2009, market breadth and internals are equally bad.

Here, however, is where I have to point out that the economy is nowhere near as bad today as it was back in 2009. To me, it calls into question how long this extreme situation can last.

As painful as it may seem, the employment situation is oh-so-slowly improving. Retail sales have not stalled out. The aforementioned ISM reports have been soft but still show (just barely) that expansion is still taking place. Manufacturers are still hiring even though the last couple of Durable Goods reports were not especially inspiring. In 2009, all these indicators were still in free fall; now they are at least on an upward path.

In any case, at least some investors are looking at the glass as half full. At the close on Friday, the NASDAQ 100 (and its associated ETF, the QQQ) managed to close just above the bottom line of its consolidation pattern. This is pretty much the only index that managed to salvage some shred of support last week though it must be said that stocks did fight back from deeper lows on Friday. So with the NASDAQ 100 hanging on by a thread, it could be said that large cap tech appears to be one of the stronger market sectors. Since tech is often a leader coming out of downturns, this is one small sign of hope for this market.

On the other hand, I am writing this on Sunday night and the Nikkei is down 1.39% and the Hang Seng is down 2.37%. If that negativity makes its ways to Monday's session in the U.S. (our futures at this time show further declines in store on the order of 1.5%) we could see the other shoe drop and take the QQQ down with everything else.

The bottom line here is that charts are a mess and the economy is less than inspiring. Seems like a good time to be out of the market, right? But I can't help thinking the charts above suggest stocks can't stay at these levels for long. When the rally comes, it will probably be as surprising as this past week's decline. I hope you all have a good watch list of stocks you would like to pick up at discount. It seems stocks will be even cheaper over the next few days.

Disclosure: none

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