A Final Thought for 2007

Another year has come and another year has gone..

2007 has had more than its share of turmoil in the markets as we have been witness to the continuing collapse of the United States housing market, the credit implosion, rising inflation, and signs that the US economy is headed into a recession (as judged by the GDP but I already feel that we are in a recession). Although market volatility as measured by the VIX did not set an all time record we did create in many aspects this year a new definition for volatility.

We leave 2007 with confidence in the financial institutions damaged at best and the cancer of the credit crisis further crippling the housing market and the economy as a whole. The clock may strike midnight tonight, the calendar will change and we all will mistakenly write 2007 for a few week when we write checks. But even though the calendar will say a brand new year is upon us after midnight, the party atmosphere will soon wear thin again once the earnings of corporations who have enjoyed double digit growth no longer are able to report those same stellar numbers. The impact of the credit implosion, the housing decline, and the inflation will be felt at the corporate level in 2008 at an increasing pace.

But in spite of all of this we will have a prosperous 2008 as we will be on the ‘right side’ of the trades and sectors in the end. 2008 also brings the new web site with new features and helpful sector analysis, real time interaction with us, a member forum to discuss your own ideas, and a weekly webinar (after market hours) with Q/A and insight into the market from our technical analysis.

Lisa and I are very excited to bring to you the complete RebelTraders Web portal and we hope you will like it as well. Lisa and I pride ourselves on being professional and this will show in our web site.

So how did 2007 end up? How about some year end stats:

Stocks that are under their 200 day moving averages

• S&P 500:    56% are under 200 day moving average
• Dow:            43 % are under 200 day moving average
• Nasdaq:      55% are under 200 day moving average

Gains/Losses for 2007:

S&P 500 3.5%

Nasdaq 9.8%

DOW 6.4%

Russell 2000 -2.7%

S&P Small Cap Index - 1.2%

S&P Mid Cap Index 6.7%

US Dollar Index - 10.9%

Gold 35.4%

Lisa will be posting a commentary tomorrow. . Until then we wish all a healthy and happy (and prosperous!) 2008!

 

 

 

 

 

Pre Market - December 31st 2007

A slow morning with many foreign markets already closed. Futures heading into the open are on the soft side. Only news coming this morning of note is the existing home sales data.

For those of our readers who will not be around for the end of day wrap up Lisa and I want to extend to you and your family a very healthy, happy, and prosperous 2008!

Some Sunday thoughts

Market Analysis,Economy,Housing Crisis,Nikkei

First a reply to a comment from Dave…

The chart of the World Index is meant to show underlying weakness, not as a tool for deciding to buy or sell. You mentioned that the bull market has been strong, on the contrary, all of the technical indicators and market breadth charts have shown that while the markets have advanced the supporting indicators have been softening. This is what is called a divergence and it is important to keep them in mind going forward. The new highs and new lows index chart clearly shows that while the market has been advancing over the past year the new highs has been falling. There is no argument or discussion with regard to what that means. It is a clear indication that the markets have been advancing on fewer and fewer stocks rising. This is visible on the advance / decline charts as well. Just how long do you think the broad markets will keep going on Apple, Google, Solar stocks, and some shippers? Sorry, but a handful of momentum stocks will not support our entire stock market.

We will continue to look for long positions as well as short positions to trade. But we NEVER lose sight of the big picture. For it is the big picture that tells us where we are likely to be headed.

Some news items over the weekend:

• Japanese newspapers are reporting that the Bank of Japan may cut Japan’s GDP yet again, the article reports that Japan may cut the GDP to 1.3%, down from 1.8%. Recall the chart I showed of the Nikkei Average. I am concerned about the Japanese market going into a long down trend.
• The Financial Times reported this weekend that over the last 6 months commercial and investment banks in the United States have had to raise $83 Billion dollars in liquidity. This is an all time record. Now think about this for a minute if you will, never in history until now have banks had to raise so much mi9ney in such a short period of time in order to have enough capital to operate. That does not give me a great deal of confidence in our financial markets health.
• A famous and well respected economist, Robert Shiller from Yale University in an interview with the London Times said yesterday that the losses resulting from the housing crisis will likely triple over the coming years. And goes on to say that the current losses which can be attributed to the housing crisis have already hit $1 Trillion Dollars.

 

The Day that Was - December 28th 2007

As we come to the end of the year we are looking at a year that had a rapidly deteriorating housing market, rising unemployment, slowing economic growth, and rising inflation. Add on top of that the credit crisis and financial losses by the nations largest financial institutions.  We are going to look back at 2007 one day and say that it was the beginning of the bear market. Actually the conditions that lead to this situation have been festering for some time, it is in 2007 that the cancer has spread.

This morning the new home sales data was released for November and it was a substantial 9% lower showing that not only has the sales continued to deteriorate but it has accelerated. And with new homes selling for less than existing homes on average now this means that existing homes are selling at an even worse level. As real estate values continue to decline it will spread to lower tax revenues for towns, cities, and state budgets. I will not be one bit surprised to see in 2008 a decline in Government employment at the State and local levels. A domino effect in the making…

The chart below shows the current new home sales decline.

 

 

 

 

 

 

(Data Source: Moody’s)

There is one trading day left around the world in order to negate the current ’sell signal’ being shown on the monthly chart of the Morgan Stanley ‘World Index’. A monthly charts technical signals don’t become valid until the month actually end but at this time, with one trading day left we have a MACD sell signal on the world index. Technical signals on monthly charts are strong indicators and are watched closely for long term sentiment. Should this MACD move into the negative remain confirmed after Monday’s trading it will be one more piece of information which reveals that on a global basis the markets are losing strength. And in a global economy this is a negative sign for all markets involved.

 

 

 

 

 

 

 

 

 

Of particular note here is that the rise in the global markets was occurring while weakness was already being shown in the MACD trend since 2004. Just as I pointed out last night with the New Highs - New Lows data, the markets have been rising on less and less support.

Over the weekend we will be conducting a lot of analysis in order to have some ideas for starting out 2008 with. But if the events of 2007 go without substantial remedy then 2008 will be trouble for the markets.

Market Update

The housing data came in very low, much worse than expected. Shows that a bottom in the housing situation is no where in sight yet. Financial’s, Home builders, and retail all in the red again.

Tonight I will show the World Index chart, it is still showing a ’sell’ signal on the MACD. If that signal holds through next week it will give a ‘technical sell’ signal with regard to the equities markets worldwide. It does not mean that instantly everyone will be selling stocks around the world, just another technical indication that on a global scale the markets are weakening.

More later..

Pre Market - December 28th 2007

Not much to report in the pre market…

Futures are up on ‘relief’ that the situation in Pakistan appears to be stable at the moment, however oil is not ‘relaxing’ yet as it is still heading upwards. Housing data comes out at 10am.

The Day that Was - December 27th 2007

The news this morning out of Pakistan had an immediate impact on the price of Gold as it resumed an upward trend today. For those who follow our site regularly know we have remained bullish on Gold for quite a long time. Today Gold hit $824 and at the time of this writing Gold is trading at $827 in the Asian markets. The assassination in Pakistan did not move our futures in the pre market all that much. What did set the tone for today’s selling was the weekly jobless claims and the durable goods order data which were both negative for the economic outlook.

Economists were calculating that the durable goods data for November would come in at a positive 2.0% but instead it came in at 0.1%. And to make matters worse once the transportation costs were taken away to get to the core readings it was a negative 0.7%. The chart below shows the trend of durable goods orders, once again trends speak louder than a snapshot. Notice the decline over the past 18 months.

 

 

 

 

 

 

(Data source: Moody’s)

Today’s market saw every major sector end the day in the red as the selling was fairly broad based across the board.

Earlier today I said that the market action reminds me of the tech bubble crash in 2000 and the reasons are many. I’ll address some here now. First, we are seeing more and more companies buying back their shares. The amount of corporate share buy backs has increased substantially over the past 7 months and this was also the case before the market crash in 2000. Recall Lisa’s article on corporate share buy backs and how it is used to bolster their earnings per share (EPS) without actually increasing the earnings. Additionally, it is always concerning when a company spends large sums of money to buy back shares instead of putting that money in capital expenditures to grow the company organically. Beware of companies that buy back their shares, for it may tell that their growth is reaching a limit.

Second, the technical indications of divergences are becoming quite concerning. For example, last night I discussed the new highs vs new lows occurring in the major markets. When you see the broad indices continue to make new highs but the trend of the individual stocks themselves continues to show a down trend in the number of new highs it is a divergence. As I explained to one of our readers earlier it means that the indices are rising on fewer and fewer stocks supporting it. Once again, for those who follow our site know that I have been using the metaphor of the circus act of the ‘human totem pole’. The man on the bottom can only support the rest of them for so long before he gives in to the weight. A healthy bull market has all technical indicators trending in the same bullish direction. When they diverge from each other then that is a warning of weakening support and a matter of time before the markets themselves give in and fall. The divergences have been showing up for quite some time now and we have discussed them often here. 

Third, the number of financial analysts attempting to make the market appear bullish has ramped up a notch for every down ward piece of economic data or other technical indication. Just like before the tech bubble implosion in 2000 the analysts and talking heads kept pushing the markets and touting how great a buying opportunity it was. The media could pull video tapes of financial analysts and their views in 1999 and 2000 and air them today and you would not be able to tell the difference in many cases, the same ‘buy on the dips’ mantra continues today as it did before the crash in 2000.

Four, just before the crash of 2000 the market was making new highs and companies were reporting huge revenue gains and had earnings projections that were very optimistic,  just as we are seeing currently.

Five, we are facing an accounting nightmare in the making with corporations (mostly banks and other financial institutions) needing to have their corporate earnings certified by their independent auditors. The sub prime meltdown with still unknown losses on certain types of assets will result in corporate auditors not signing off on the company year end statements unless there is some hard evidence to back up the corporate data. With much of the SIV’s, CDO’s, and other commercial paper still not able to be valued it leaves for an accounting nightmare in the making. Recall Arthur Anderson and Enron? And that brings us to the losses being reported by the financial institutions. Billions of dollars being lost by financial institutions almost seems common place now in the news, but what is not known yet is just how much more is still to come. Today it is being projected that Citigroup (C) will likely have to cut its dividend by 40% in order to hold on to much needed cash, additionally their losses may reach $18.7 Billion dollars. Each time a financial institution reports their losses they give statements that things are under control and they are on a path to recovery, then more losses come out of the woodwork. There are most likely many more losses yet to come.

Sallie Mae (SLM) is selling $2.5 Billion dollars of stock in order to raise liquidity needed to stay in compliance with mandatory capital requirements. I still project that the bond insurers Ambac (ABK) and MBIA (MBI) will suffer greater losses and become in danger of becoming insolvent. And Sallie Mae is added to this list.

Six, we are experiencing a housing decline of a magnitude not seen in a very long time. Independent analysts have drawn comparisons to the great depression in regards to the intensity of the losses being witnessed.

There are many divergences in the markets and I have just touched on some of the factors contributing to and/or making some of them. Next month begins earnings season, and we will begin to see just how much of an impact this sub prime mess will start to impact other parts of the economy. Will it be next quarter that the companies show the weakness the divergences are showing? My view is it will be the beginning…

In 2000 they called it the "tech bubble burst", In 2008 we may be calling it the "credit bubble burst"…

Market Close

The economy took center stage today along with additional financial sector troubles.

This market action continues to get more and more concerning. In many aspects I am reminded of the tech bubble burst, although this time it is not a tech bubble that is going to burst, the prelude is what is very similar.

More tonight in the wrap…

Dave, the meaning of the NYSE (and Nasdaq) new highs - new lows down trend over the past few years is extremely important. What is says is that the broad market is advancing with fewer and fewer stocks making new highs. In other words as time goes on the market is being lifted by fewer stocks. A house of cards if you will…

Pre Market - December 27th 2007

The market moving news this morning is from three events.

First we have political turmoil in Pakistan with the assignation of former Prime Minister Benazir Bhutto.

And on the economic front we had two bits of data which were not good for the economic outlook, weekly jobless claims have gone up again with the weekly numbers being 349K and the continuing claims also rising to 2.713 Million. The weekly jobless claims when viewed over the longer term has an upward trend showing an increase in unemployment is building.

Durable goods orders for November came in as a surprise lower than expected. When transportation is excluded (core data) the data is negative 0.7% vs an expected positive 0.5%. And the prior months data was revised down ward as well. The core data for October was revised to negative 0.9%.

We’re looking at some increased volatility today and at the moment we will be opening lower.

New Highs - New Lows

Dave,

You said that yesterday there were more new highs than new lows on both the NYSE and on the Nasdaq. But that is incorrect.

The NYSE new highs - new lows was a negative 20 for yesterday and the Nasdaq was a negative 7.0 for yesterday. But more importantly is not an individual day but the trend. The chart below shows the trend of new highs - new lows. The day to day snapshots are not so important, but the trend is. I applied a moving average to the data and once the moving average is displayed you can see the trend is down over the past few years. The trend is more important…

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