3 SIGNS OF A SUCKER RALLY AFTER EXAMINING TECHNICAL EVIDENCE, SENTIMENT INDICATORS AND VARIOUS VALUATION METRICS, IT BECOMES OBVIOUS THAT THE RECENT BOUNCE PROVIDES A SELLING, NOT BUYING OPPORTUNITY ...’
AP BUSINESS HIGHLIGHTS On Thursday June 24, 2010,
6:14 pm
Mortgage rates
at lowest point since mid-1950s
WASHINGTON
(AP) -- Mortgages are cheaper today than they've been in a half-century. If
only most people had the job security, the credit score and the cash to
qualify.
The average
rate for a 30-year fixed loan sank to 4.69 percent this week, beating the low
set in December and down from 4.75 percent last week, Freddie Mac said
Thursday. Rates for 15-year and five-year mortgages also hit lows.
Rates are at
their lowest since the mortgage company began keeping records in 1971. The last
time they were any cheaper was the 1950s, when most long-term home loans lasted
just 20 or 25 years.
Companies ramp
up spending, fuel economic growth
WASHINGTON
(AP) -- Companies are spending again, and that could mean better economic times
ahead.
Businesses
have invested more money in machinery, computers, steel and other metals in
three of the past four months. The uptick is fueling economic growth in the
second quarter and may lead to more jobs later this year.
The rise in
corporate spending comes at a critical time for the recovery. The unemployment
rate has been stuck near double digits all year. And while the pace of layoffs
slowed last week, the number of people seeking first-time jobless benefits
remains about the same as in January.
Retailers,
banks pull stocks lower; Dow slides 146
NEW YORK (AP)
-- Disappointing forecasts from retailers and concern about the government's
financial overhaul package pounded stocks Thursday.
The Dow Jones
industrial average lost 146 points to 10,152.80 after edging higher Wednesday.
Broader indexes dropped for a fourth straight day.
Downbeat
forecasts from retailers raised concerns that high unemployment and weak
consumer spending would stall an economic rebound. Nike Inc. dropped 4 percent
after saying increased costs could hurt earnings. Bed Bath & Beyond fell
2.4 percent after the home goods retailer's second-quarter earnings forecast
missed expectations.
Oracle's net
jumps 25 pct in first full Sun quarter
SAN JOSE,
Calif. (AP) -- Oracle Corp.'s net income jumped 25 percent in the most recent
quarter as CEO Larry Ellison trumpeted momentum in the company's efforts to
sell computer hardware and in its showdown with IBM Corp.
The results,
reported Thursday after the market closed, were helped by stronger sales of
database and other business software and a bump from its acquisition of Sun
Microsystems.
Sun, which
makes computer servers, has been struggling with severe market-share declines,
but cost cuts under Oracle appear to be turning the company around.
Discover posts
profit as credit card use jumps
NEW YORK (AP)
-- Discover Financial Services said Thursday that it returned to profitability
in its fiscal second quarter as consumers spent more with their credit cards.
The company
also said the rate of accounts in early delinquency continued declining. In the
quarter, Discover put aside $724 million for bad debt. That was 44 percent less
than last year.
The results
reinforce recent signs that the consumer credit landscape is improving. Still,
the recovery has a long way to go. The national credit card charge-off rate
remains elevated at 9.95 percent, compared with about 4 percent before the
downturn, according to data from the Federal Reserve.
Lennar
reverses loss in 2nd quarter, sales slump
LOS ANGELES
(AP) -- Lennar Corp. said Thursday it bounced back from a year-ago loss in its
fiscal second quarter, but the end of federal homebuyer tax credits hurt the
homebuilder's new home orders and contributed to a 9 percent drop in revenue.
Chief
Executive Stuart Miller said new home orders got progressively weaker in the
March-May quarter once the government incentives expired at the end of April.
But he noted demand appears to be improving this month and he stressed the
company should remain profitable this year.
Nationally,
sales of new homes collapsed in May, sinking 33 percent to the lowest level on
record.
Latest Pfizer
drug failure shows worrisome trend
TRENTON, N.J.
(AP) -- Yet another experimental drug heavily touted by Pfizer Inc. has
foundered in advanced testing, raising worries about productivity problems at
the world's biggest drugmaker.
Safety
problems with potential osteoarthritis treatment tanezumab, quietly disclosed
Wednesday evening, on Thursday triggered a drop in Pfizer shares and a burst of
notes to investors from analysts concerned about the trend.
This Monday,
New-York Pfizer said it was pulling bone cancer drug Mylotarg off the market 10
years after it got accelerated U.S. approval, because recent research found the
drug increased chances of dying in patients also getting chemotherapy.
Ex-Brocade CEO
sent to prison for stock backdating
SAN FRANCISCO
(AP) -- A federal judge on Thursday sentenced Brocade Communications Inc.'s former
CEO to 1 1/2 years in prison for failing to disclose -- and then covering up --
a plan to alter the date of stock option grants so employees could reap greater
compensation.
U.S. District
Judge Charles Breyer also fined Gregory Reyes $15 million. Reyes is to report
to prison Sept. 10. Reyes' lawyers said he is considering an appeal.
A jury in
March convicted Reyes of nine counts of fraud and making false statements. The
jury acquitted him of a conspiracy charge.
Gasoline
prices up as July 4th holiday approaches
Filling up the
family car's gas tank is getting more expensive as the 4th of July weekend
nears, but that won't stop a lot of people from hitting the road.
Gasoline
prices rose 1.2 cents Thursday to a national average of $2.753 per gallon, according
t AAA, Wright Express and Oil Price Information Service. Pump prices are 2.7
cents per gallon lower than month-ago levels and 7.7 cents higher than a year
ago.
Prices have
jumped 4.6 cents in the past week. AAA expects gas to average between $2.70 and
$2.80 per gallon for the holiday. That's about the same as the Memorial Day
weekend.
Former Qwest
CEO's sentence cut by 2 months, $7.4M
DENVER (AP) --
A federal judge on Thursday cut former Qwest CEO Joseph Nacchio's insider
trading sentence by two months and reduced the amount of money he must forfeit
by $7.4 million.
Nacchio was
convicted of selling $52 million in Qwest Communications International Inc.
stock in 2001 based on nonpublic information that Qwest was in danger of
missing its sales forecasts that year.
Nacchio
originally was sentenced in 2007 to six years in prison and was ordered to
forfeit $52 million, but the 10th U.S. Circuit Court of Appeals ruled last year
that the sentence should be recalculated to focus on how much of Nacchio's profits
actually came from having insider information.
By The
Associated Press
The Dow fell
145.64, or 1.4 percent, to 10,152.80.
The Standard
& Poor's 500 index fell 18.35, or 1.7 percent, to 1,073.69. It was the
first four-day drop for the S&P 500 index since early May. The Nasdaq
composite index fell 36.81, 1.6 percent, to 2,217.42.
Crude oil rose
16 cents to settle at $76.51 a barrel on the New York Mercantile Exchange.
In other Nymex
trading, heating oil fell 1.12 cents to settle at $2.0572 a gallon, gasoline
gained 1.12 cents to settle at $2.0935 a gallon and natural gas was off 6.6
cents to settle at $4.748 per 1,000 cubic feet.
Brent crude
rose 20 cents to settle at $76.47 on the ICE futures exchange.
Stocks Slide, Extending S&P's Decline to Four Days Midnight Trader 4:13 PM, Jun 24, 2010 --
GLOBAL SENTIMENT
UPSIDE MOVERS
(+) MIPI jumps on positive study data for Azedra.
(+) DFS gets upgraded.
(+) HAS jumps on report company to be taken private.
(-) OXGN says Zybrestat data to be presented.
(-) KMX upgraded.
DOWNSIDE MOVERS
(-) ADSK raises bottom end of Q2 guidance.
(-) LEN misses with revenue.
(-) NKE continues evening decline that followed
earnings.
(-) BBBY continues evening decline that followed
earnings.
(-) GENZ downgraded.
(-) CYAN earnings fall vs year-ago quarter.
MARKET DIRECTION
The leading stock averages close at or within a
whisker of day lows. For the broad S&P 500, its four-day slide is the
longest in seven weeks. Investors can't shake the pall of recent economic
reports and the Federal Reserve's lukewarm assessment of the recovery. The
decline comes despite data released this morning that showed unemployment applications
fell last week and durable goods orders, while declining, weren't as bad as
some analysts had predicted.
Both Nike (NKE) and Bed Bath & Beyond (BBBY) remain lower late after
their respective earnings disappointments. Their performance rekindled concern
for consumer spending.
Uncertainty for financial shares as Congress irons
out a financial reform bill weighed on issues including Bank of America (BAC), down 2.1%, and Citi (C), down 2.3%.
Morning economic data weren't abysmal but did little
to restore investor confidence.
The government said initial claims for unemployment
benefits fell to a seasonally adjusted 457,000 last week. That's slightly better
than the 460,000 forecast by economists polled by Thomson Reuters. But claims
are still above levels that would signal employers are picking up hiring.
A second report showed orders for durable goods fell
last month for the first time in six months. Orders for big-ticket goods fell
1.1% in May, slightly better than the 1.3% drop predicted.
Commodities finished higher as both gold and crude
oil futures gained despite a rough start to the trading day.
Crude-oil for August delivery is up 0.2%, or $0.15,
to $76.51 a barrel on the New York Mercantile Exchange.
In other energy futures, heating oil fell 0.94%, or
$0.02, to $2.04 a gallon while natural gas fell 1.44%, or $0.07, to $4.73 per
million British thermal units.
Meanwhile, gold for August delivery rose $11.10, or
0.96%, to $1,245.90 an ounce. In other metal futures, silver rose $0.26, or
1.38%, to $18.76 a troy ounce while copper rose $0.07 to $3.02 a pound.
3 SIGNS OF A SUCKER RALLY , On Thursday June
24, 2010, 3:25 pm EDT
At first glance, fool's
gold cannot be distinguished from real gold. Even upon examination, novices are
not able to discern the difference. To avoid getting fooled, miners have come
up with the acid test.
Most metals tend to bubble
or fizzle when they come into contact with acid, precious metals don't. Placing
a small drop of a strong acid, such as nitric acid, onto the metals surface
quickly and unmistakable differentiates real gold (NYSEArca: GLD
- News)
from fool's gold.
Is there a time-tested
method to distinguish a bull market from a 'fools market?' Is the market
'bubbling' right now (two-fold meaning of bubbling intended)?
A thorough acid test for
stocks (NYSEArca: VTI - News)
involves a short-term and long-term analysis from multiple angles. Sentiment
indicators, technical indicators, fundamental data, and valuations should be
taken into account.
Volume and Conviction
Discernment of trading
volume is one of the most basic components of technical analysis. High trading
volume shows conviction, while low trading volume indicates lack of conviction.
Trading volume is not a short-term indicator, that's why we look at longer-term
time frames.
The chart below reflects
the analysis of the NYSE trading volume over three time-frames.
1) The October 2007 - March
2009 decline
2) The March 2009 - April
2010 rally
3) The post April 26, 2010
decline
[CHART]
The daily NYSE trading
volume from the October 2007 highs to the March 2009 lows averaged 1.48 billion
shares. The daily trading volume from the March 2009 lows to the April 2010
highs average only 1.30 billion shares, a 12.63% drop. The trading volume since
the April 26 peak averaged 1.59 billion shares, a 23% increase.
What's the essence of this
analysis? Conviction associated with the March 2009 - April 2010 rally was
limited compared to the declines that sandwiched the rally. According to
trading volume, the March 2009 - April 2010 rally was a counter trend or sucker
rally.
If we drill a bit deeper,
we see a large number of distribution days occurring since the April highs.
Distribution days see the major indexes decline on large volume. Not only that,
the rally that lifted the S&P (NYSEArca: SPY
- News),
Dow Jones (NYSEArca: DIA - News)
and Nasdaq (Nasdaq: QQQQ - News)
some 7% over the past two weeks has come on the lowest volume in nearly two
months (see chart below).
[CHART]
The conclusion we may draw
is that not only has the larger trend turned down, the recent rally seems to be
fizzling out as well.
Wall of Worry
It is often said that new
bull markets climb a 'wall of worry.' The 'wall of worry' is a broad
description and can easily be misunderstood. We'll clear up some of the
confusion here and highlight how you can measure 'worry.'
Bear markets go through
three stages. The third and last stage of a bear market - or one leg within a
larger bear market - is the 'throw in the towel' stage. In this stage investors
are worn out by the bears shenanigans. Either they get tired of waiting for
'just one more rally' that doesn't show up, or looking at ever falling
portfolio balances.
Either way, investors do
what they should have done a long time ago, they sell. Initially, phase 3 tends
to drive down prices even further. It can also be considered the capitulation
phase. Generally, the market bottoms shortly after most investors capitulate
and throw in the towel.
We saw phase 3 play out in
February/March 2009. From 9,000 in January, the Dow tumbled to 6,500 in March.
During that phase, investors capitulated. This drove price significantly lower,
but (and that's a bit but), it also established a bottom.
When most investors were
capitulating, the ETF
Profit Strategy Newsletter recommended selling previously recommended short
ETFs and load up and long and leveraged long ETFs via the March 2, 2009, Trend
Change Alert.
It is important to note
that the 'throw in the towel' phase lingers around during the initial portion
of the recovery where investors refuse to accept that a low is in place. This
spillover from the 'throw in the towel' phase IS NOT the 'wall of worry.'
If there were a 'wall of
worry' it would persist throughout the rally. As the chart below shows,
however, investors became more and more comfortable with the idea of risking
prices as stocks rallied.
[CHART]
By May 2010, 56% of
investment advisors tracked by Investors Intelligence were outright bullish,
the highest reading since December 2007. A few weeks earlier, the CBOE
Volatility Index (Chicago Options: ^VIX) had fallen to the lowest level since
July 2007.
Based on these and other
extremes and the apparent absence of a 'wall of worry,' the ETF Profit Strategy
Newsletter noted on April 16 that 'historically, there has rarely been a more
pronounced sell signal.'
From the extreme pessimism
seen at the March 2009 bottom, the market (NYSEArca: TMW
- News)
rallied on extreme optimism. Extreme optimism, particularly amidst
deterioration of fundaments, is usually associated with a major top.
Valuations
Less is more. Ivy League
Wall Street gurus prefer to use high-tech simulation models to predict the
market's futures. Truth be told, none of those high tech tools saw the
2000 tech crash (NYSEArca: XLK - News),
2005 real estate crash (NYSEArca: IYR - News)
or 2007 financial crash (NYSEArca: XLF
- News)
coming.
Three simple valuation
measures, however, did. Valuation measures are not short-term timing tools, but
they allow you to see the market's short-term behavior in the long-term
context. Sooner or later, stocks always revert to their mean.
Any asset class may remain
over or under-valued for a while, but eventually it will revert to fair
valuations. That's simply how it is.
Based on P/E ratios,
dividend yields and the Dow measured in gold (NYSEArca: IAU
- News),
stocks were overvalued by a large margin already in March 2009 and particularly
in the beginning of 2010.
Over the past six months we
saw P/E ratios spike to an all-time high, while dividend yields and the Gold
Dow challenged their all-time lows.
Market bottoms are made of
the exact opposite - rock-bottom P/E ratios, sky-high dividend yields and a
Gold Dow that's rising, not plummeting.
After examining technical
evidence, sentiment indicators and various valuation metrics, it becomes
obvious that the recent bounce provides a selling, not buying opportunity.
In fact, the July ETF
Profit Strategy Newsletter featured the one chart pattern that
highlights just how steep the next leg of the decline could be. Each issue of
the newsletter includes a short, mid and long-term outlook for the major asset
classes, along with a detailed analysis of the above- mentioned 'red flags' and
corresponding profit strategies.
Remember, sucker rallies -
just as fool's gold - appear to be real, but they're not. Use the modern day
acid test and protect your portfolio.