Week In Review: All 30 DJIA Components Rise

The first week of the year includes many impressive gains. Among the DJIA components, all 30 were up this week, and all ten sectors were up as well. That happened exactly four weeks ago too, but the index levels have not changed much in the interim.

However, the psychology definitely has. At this point, traders are more confident. I expect to see trading volumes increase across the board now, rather than just in Oil (USO) and Treasury Bonds ((TLT) and the inverse (TBT)).

In preparing for a stronger equity market in 2009, I made three changes in the Cara Global Best 100 companies list.
http://caracommunity.com/content/changes-cara-global-100-list-jan-3-2009

I removed two integrated energy companies, Norway’s StatoilHydro (STO) and France’s TOTAL (TOT) and replaced them with Houston Texas-based independent energy company Apache Corporation (APA) and oilfield services giant Schlumberger (SLB).

I also replaced toolmaker Stanley Works (SWK) with computer network technology company Juniper Networks (JNPR).

The new companies, I believe, are growing faster, have higher margins and investment returns, with less debt. Besides, they are more active traders, particularly in put and call options.

At the end of the day, the Cara 100 companies list is an exercise in focusing on quality. We still have to trade the stock price for a profit. But, with only so much time for research, it pays to study companies you rate more highly. It’s easier too focus on the things you have more respect for.

Having said that, it is true that (i) the three companies I removed are still very high quality and (ii) every company and the industry they operate in has its ups and downs, and traders buy them too high at the cycle tops and sell them too low at the cycle bottoms. The latter point is the basis of our trading strategy.

In seeking alpha, my trading philosophy is really simple: let the market come to you. If there are line-ups of buyers, then be a seller and if there are line-ups of sellers then be a buyer. But do so only at times when the emotions of the buyers and sellers are high. The financial services industry sell-side plus the media will always stir up the emotions of the public; so the market will always come to you. Be patient.

Also, be flexible in your thinking because markets are volatile. You may be a buyer one hour or day or week or month and a seller the next.

Global Economics Review

I leave the links in here because the Econoday Reports contain terrific charts and other information, and after the report is published, the link leads to the updated report. I strongly advise the Cara Community to avail themselves of research from Econoday because it is objective, educational and solid in every way. The founder and operator Cynthia Parker, who I have spoken to on several occasions and consider a friend, has done wonders with this service.

On January 2, the first key economic report of the year was the US ISM Manufacturing Index:

US Economic Calendar. Econoday reported, “The manufacturing sector is contracting at a severe and accelerating rate, indicated by the 32.4 reading for the ISM’s manufacturing index — one of the very lowest readings in 60 years of data. The previous and consensus numbers were: 36.2 and 35.5. The December report is unfortunately filled with record lows or near record lows. One of the most worrisome is an 18.0 reading for prices paid, a low last exceeded back in 1949. Price contraction reflects a combination of collapsing fuel costs and a collapse in demand as businesses destock. The inventories index fell for a second straight month, down 3 tenths to 38.8… Employment is especially depressing, down more than 4 points to 29.9. New orders and backlog orders are severely depressed in the low 20s, readings that point to deepening trouble ahead. Financial markets showed surprisingly limited initial reaction to the results.”

Here are the key US economic reports on the calendar this coming week and the Econoday analysis from last month.

US Motor Vehicle Sales report. Econoday reported, “Sales of domestic motor vehicles in November came in at a 7.5 million annual unit rate for domestic-made models - little changed from October. Levels unfortunately are at lows not seen since the early 1980s. Sales are not likely to pick up much in December despite incentives from dealers as the job situation has worsened, credit is still tight, and consumers are worried about U.S. manufacturers still facing the strong possibility of bankruptcy… Motor vehicle domestic sales Consensus Forecast for November 08: 7.4 million-unit rate with the Range: 7.0 to 8.2 million-unit rate.”

US Construction Spending for November. After the release of the October data, Econoday reported, “Construction spending dropped 1.2 percent in October, after no change in September. Weakness in the latest month was led by a sharp 3.5 percent drop in private residential outlays. Private nonresidential spending also declined - by 0.7 percent. In contrast, public outlays rebounded 0.7 percent in the latest month. Given the fall in housing starts in October to a record low 625,000 units, residential outlays will likely lead overall construction spending down in November… Construction spending Consensus Forecast for November 08: -1.3 percent with the Range: -2.5 to -0.2 percent.”

US Factory Orders data for November. After the October data was released, Econoday reported: “Factory orders in October plunged 5.1 percent, marking a third straight severe decline. Both durables and nondurables orders fell sharply. However, orders for nondurable goods were pulled lower by a mostly price-related fall in energy goods. Based on more recent durables data and further declines in oil prices, November is going to be another very negative month for overall orders. Durable goods orders fell 1.0 percent in November… Factory orders Consensus Forecast for November 08: -2.5 percent with the Range: -6.5 to -0.3 percent.”

US Pending Home Sales data for November. After the October data was released, Econoday reported, “The pending home sales index for October fell 0.7 percent to 88.9 with the year-on-year rate slipping back below zero at -1.0 percent. But we could see some improvement in November based on a jump in mortgage applications due to the recent, sharp decline in mortgage rates. Most recently, purchase applications in the Dec. 26 week rose 1.4 percent to 320.9… Pending home sales Consensus Forecast for November 08: 88.0 with the
Range: 84.5 to 90.2.”

US Weekly Jobless Claims data. After last week’s data was released, Econoday reported, “Initial jobless claims for the week ending December 27 surprisingly fell a sharp 94,000 to 492,000. The 94,000 drop is the largest weekly drop in 17 years. Because of adjustment factors surrounding the Christmas holiday (including a four day work week), however, the four-week average at 552,250 is a much better gauge which, next only to the prior week, remains at the highest level so far in the recession… Jobless Claims Consensus Forecast for 1/3/09: 540,000 with the Range: 490,000 to 580,000.”

US December Jobs Report. After November’s data was released, Econoday reported, “Nonfarm payroll employment in November fell over a cliff with a 533,000 drop, following a revised fall of 320,000 in October. The November drop was the worst since the 602,000 decline in December 1974. Nonfarm payroll employment fell every month in 2008. Average weekly hours edged down to 33.5 hours from 33.6 hours in October. Looking at wage pressure data, average hourly earnings rose 0.4 percent in November after increasing 0.3 percent in October. Turning to the household survey, the civilian unemployment rate spurted higher to 6.7 percent from 6.5 percent in October… Nonfarm payrolls Consensus Forecast for December 08: -500,000 with the Range: -750,000 to -300,000. The Unemployment rate Consensus Forecast for December 08: 7.0 percent with the Range: 6.8 to 7.1 percent.”

(AAPL) (MSFT) (GOOG) (QCOM) (RIMM) (CSCO) (INTC) (ORCL) (GILD) (EBAY)

Here is the list of the ten highest-weighted non-financial stocks in the NASDAQ Composite. Put them in a watchlist (see Google Finance Portfolio) and watch them like a hawk:

For a couple weeks in this space I have written, “The macro-economic data has been painting a dour picture for many months. I continue to say that it’s always a good thing to err on the side of caution, but I would not want traders to miss the good values that are popping up these days. Yes, same old, same old. But you have to make a decision in your own mind; do you believe that the world is headed for a Great Depression or not? I think not. I believe that governments around the world have agreed to reflate, and, at the same time, create new structures for international trade and commerce, capital markets, and regulation… In the US, President-elect Obama has selected a solid team who, I believe, will get the job done. The SEC and CFTC will very likely be merged, and made into a single powerful regulator, while the Fed will be moved back into the private sector with Treasury being made more responsive to Congress, as it should be… Around the world, every country is staring depression in the eye, but I think that steps will continue to be taken that will change the situation.”

After the 1929-1932 market crash, the policies of the Fed in 1933 and 1934 were sufficient to take the S&P 500 index from 4.40 on June 1, 1932 to 13.21 on Oct 25, 1939 for a +200% market gain during the economic period known as the Great Depression.

Despite perhaps the most deplorable time in the economy in the history of the US, there were five bull markets in less than seven years averaging +84.8%. If you work the numbers through four bull markets ending Nov 9, 1938, the average gain was +98.6%.

Every time I hear an economist like Roubini tell you the stock market is going to crash from here based on their assessment of the economy, you are going to hear me tell them to put their head between their legs and blow all the smoke they want because its just foul smelling hot air with little to nothing to do with the equity markets.

The reason traders like you miss fabulous opportunities in the market is because smart people pay economists and media to tell you the sky is falling. So you sell, and they buy.

An economist can say anything; it’s up to us to check the facts. After a while, I’ll assure you that you too will see they don’t know much more about the capital market than the average person.

Sector ETF Summary for the International equity markets

Country ETF’s were all up sharply this week. India (IFN) (IFN +13.38% this week had a much better week than last -11.29%) and so did Brazil (EWZ) (EWZ +11.89% compared to -8.04%). The biggest losers a week ago were the biggest winners this week. This is the same principle of the Dogs of the Dow Theory or the reversion to the mean concept.

In fact, if an anomaly does not soon correct, affected traders need to go looking for answers.

To repeat a concept from a week ago, “The international equity markets I like best for 2009 are Brazil and Australia, particularly Brazil although Brazil is facing major obstacles like all countries. Canada would typically be in that big winners group, but I expect there will be trade war issues pop up throughout the year that will hurt Canadian manufacturers.”

One final point is that while Friday was a big up day in the market, there were three important Country ETFs that barely moved, which could be a harbinger of weakness in those markets at their open on Monday. These markets, and the price change on Friday, were UK (EWU +0.41%), Germany (EWG (+0.57%) and Japan (EWJ +0.52%). Contrast that to the S&P 500 of the US (+3.16%), Canada (EWC +2.58%), Hong Kong (EWH +4.05%), China (GXC +6.47%), India (IFN +5.14%) and Brazil (EWZ +4.89%).

Traders arb these markets in both directions depending on the differences in market hours.

US Equity Markets Review

In this holiday shortened, very low volume week, there were 30 of 30 DJIA index components that lifted.

Even a week ago when only 7 of the 30 were up W/W, I reminded you that the character of the market was changing.

As I pointed out a week ago, bad news on the economic or corporate front does not seem to be driving the market further south. At this point, the overriding factor seems to be the confidence of traders. As I pointed out in the opening summary, with the bad news continuum of Wachovia, AIG, Countrywide, IndyMac, Fannie Mae, Freddie Mac, Bear Stearns, Merrill Lynch, Lehman Brothers, and the subsequent TARP-related banker bail-out program, the automaker bail-out, and then the Madoff fraud, there is very little confidence in the market. Traders are awaiting action from the President-elect Obama A-Team.

Also stated the past two weeks, on a purely technical basis, the US equity market is still trading in a side-tracking pattern. I continue to be bullish, and looking at value opportunities that are becoming trading opportunities on the long side. But the Monthly and Weekly RSI studies still make me want to sell the rallies after I buy the dips. There was no change this week as all the Monthly, Weekly and Daily RSI-7 values dropped from the DJIA, S&P 500, NASDAQ Composite and Russell 2000 Small Cap indexes.

Based on all the data I look at, I don’t expect to see a booming equity market until late in the first quarter 2009, and probably not until after earnings season is underway early in 2Q09. In the meantime, as I say, I am bullish and expect prices to gradually lift starting any day now; however, I continue to expect a range-bound or side-tracking market where I am selectively buying dips and selling rallies.

Before committing full positions to the long side, I need to see (i) much more volume come into the NYSE and NASDAQ, and (ii) the Financial sector (XLF) break to the upside on high volume. Then I believe the 2008 Bull Market, which I believe started on Nov 21, the day after the S&P 500 put in a low of 741, will pick up momentum. I don’t think that’s likely until the previous S&P 500 cycle high of 1007 is taken out. That would put the DJIA index break-out at about 9640.

High volume, as I see it, will occur when there are consecutive days of a +100% increase in average daily trading volumes for at least 25 of the Cara 100 stocks, with higher prices on those days. Until then, there is a lot of nervousness among traders based on the weak economic data and a fragile credit market.

If you go to the Saturday Report for the Cara 100 “Portfolio” Volume for Friday, you will see very little volume has returned to the market at this point.
http://caracommunity.com/report/2009-01-03

Individual Sector ETF Review

Here’s the XLE Monthly, Weekly and Daily data charts:

XLE (XLE) Monthly data:

XLE Weekly data:

XLE Daily data:

Table 2: Senior oil & gas equities

As you know, I have been focused on the Energy stocks and the USO crude oil ETF lately - even though a week ago $WTIC plunged -11.0% and the Energy sector (XLE) lost -2.48% to 45.16. A week earlier, XLE had lost -4.72%.

But I reminded you that “Oil is not a commodity that can be stored easily. If there is temporary surplus, government petroleum reserves can remove it with increased buying programs. Big Oil will be asking why homeland security is being put at risk by lack of buying at prices that are lower now than for almost five years. They will want to know why the previous Administration was buying at peak prices and, if it’s the case, why the new Administration is not buying at floor prices.”

So what happened this week - Big Oil and the Admin must be reading this blog - was that government decided to re-start purchases for the strategic petroleum reserves - you read the news here in advance - and USO lifted (+22.44% W/W and +7.64% on Friday), $WTIC lifted (+22.89% W/W including +3.90% on Friday), and XLE lifted (+12.52% W/W including +4.98% on Friday).

XLE was, in fact, the #1 performing sector this week.

You might say, we had a good week.

To repeat, “As I say, since oil is a consumable and a hard to store (in vast quantities) product, there will be production cut-backs will soon catch up to the decreased economic demand. Then, after signs of an economic revival, the private sector will take on increased purchases to rebuild inventories. Then as speculative funds return to the commodity trading markets, prices will soon revert to the $60-plus level. The 200-day Moving Average price, which is now $101.61 $100.34 (this week), will likely to continue to fall until oil market stability is found in the 60-75 range.”

I will already have to amend the next statement I made in this space a week ago: “As for my intermediate (say 6 month) and longer-term (say 12-15 month) targets for XLE, it would be about 60, which is about a +33% increase from today’s price of 45.16.”

At today’s price of 50.15, that is now just a +19.6% increase from today’s price.

Blink and see what happens?

But you better be good because the market could (and will at times) go against you.

It’s nice to be right once in a while, but the bigger point is that traders deal in percentages and trends and cycles. I seldom look at the price in determining my buys and sells. That is, I don’t pre-set targets (ie, goals); I only look at the trends and cycles and indications of turns. Then I look at the percentage gain or loss and the time frame.

Also, I never worry about over-trading. Commissions today are peanuts. People who won’t take a small gain are the same ones who tell you that tax considerations are a big deal. Taxes should have nothing to do with trading decisions.

The only people who argue against these methods are the ones who are not good at it. But, like I say, you better be good.

Posted in Categories: Australia, Canada, Contributor, ETFs, Energy, Eurozone, External Research, Japan, Stocks, Technology, UK, USA.

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