Bespoke Investment Group

Unemployment Above 10%

The unemployment rate hit 10.2% today, topping the 10% mark for the first time since June 1983.  Economists are generally expecting the rate to go higher before it goes lower.  Back in September 1982 when the unemployment rate moved above 10% for the first time in the post-WWII era, the rate remained above 10% for 10 months and hit a peak of 10.8% in November and December of 1982. 

With the Dow opening lower today by about 50 points only to close up by about 20 points, investors didn't seem too worried about the move above 10% in unemployment.  And they didn't seem too worried about it 27 years ago either.  In fact, the S&P 500 went from about 120 to 170 (+40%) throughout the period of 10%+ unemployment from September '82 to June '83.

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Technology Leads The Way In Guidance

Breaking up the 1,800+ US companies that have reported third quarter numbers into sectors, below we highlight the percentage of stocks in each sector that have raised guidance this earnings season.  Overall, about 11% of companies have raised guidance this season.  As shown below, Technology has blown all other sectors away, with 18.5% of tech stocks raising guidance.  Consumer Staples ranks second at 14.3%, and Health Care ranks third at 13.1%.  It's a bit surprising to see that Health Care is one of the sectors seeing forecasts increased the most, given the uncertainty around reform.  Maybe the Health Care companies are less worried about the impact of reform than investors are?

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Another Dip in the Earnings Beat Rate

More than 1,800 US companies have now reported third quarter numbers, and as shown below, the percentage of them that beat earnings estimates has dropped below 70% to 69%.  Based on the first half of earnings season, it looked like this quarter might register the highest "beat" rate in at least a decade, but if the trend continues, this quarter might not even beat the 68% reading seen in Q2 '09.  Earnings season ends next Thursday when Wal-Mart reports.

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Leveraged ETF Performance in 2009

After leveraged and inverse ETFs hit mania status in 2008 and early 2009, their star-power has begun to fade as brokerages have begun to put big restrictions on them.  But they're still being traded, and below we highlight the best and worst performing leveraged and inverse ETFs in 2009.  As shown, the 2x technology sector ETF (ROM) is up the most so far this year with a gain of 109.44%.  The 2x materials sector ETF (UYM) ranks 2nd with a gain of 96.65%, and the 2x silver ETF (AGQ) is not far behind in 3rd at 95.05%.  All but one of the best performing ETFs listed below are on the long side.  The lone short ETF that is on the list of winners is TBT, which provides 2x the inverse daily return of long-term Treasuries.

The double and triple short ETFs have gotten crushed this year, which is no surprise given the rally we've had.  The 3x short Financial ETF is down the most at -93.88%, followed by a 2x short Financial (RFN) with a decline of 81.16%.  All of the double and triple short ETFs listed below are down more than 50% so far in 2009.

 

Key ETFs Furthest Above and Below 50-Day Moving Averages

Below we highlight a list of the ETFs that are trading the furthest above and below their 50-day moving averages.  As shown, the Internet group ETF (HHH) is the most overbought at +10.49%, followed by Brazil (EWZ), Emerging Market Latin America (GML), Oil (DBO), all of Latin America (ILF), and Gold (IAU, GLD).  Other notables on the list of most overbought ETFs include China (GXC and FXI), Steel (SLX), Russia (RSX), and Silver (SLV).

The Natural Gas ETF (UNG) is trading the furthest below its 50-day moving average at -12.83%.  The Banking group ETF (KBE) ranks 2nd at -6.82%, followed by Nanotech (PXN), Clean Energy (PBW), Microcaps (IWC), and the Insurance group (KIE).

 

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Percentage of Stocks Above 50-Day Moving Averages

With the S&P 500 moving back above its 50-day moving average, the percentage of stocks in the index above their 50-days is unsurprisingly back above 50% -- 51% to be exact.  But there are still a few sectors that have failed to get this 50-day indicator back above 50%.  The Financial sector ranks the worst with just 29% of stocks above their 50-days.  Technology, Materials, Utilities, and Telecom are the other four sectors that still have less than 50% of stocks above their 50-days.  On the positive side, Energy and Consumer Staples rank the best with a reading of 73%, followed by Industrials and Health Care at 63%.  For this market to break to new highs once again, we'll need to see the Financial and Technology sectors rally back more than they have over the past couple of days.

Best and Worst Performing S&P 500 Stocks Since Obama's Election Win

Interestingly, Ford Motor (F) has been the best performing S&P 500 stock since the 2008 election.  With all the troubles that the US auto industry has gone through over the past year, Ford has made it out alive and now appears to be getting stronger.  Ford (F) is trailed by Whole Foods (WFMI) with a gain of 191.72%, AN (161.12%), EXPE (136.85%), FCX (135.88%), SNDK (105.72%), and AMZN (100.34%).  Goldman Sachs (GS) and Apple (AAPL) are also on the list of the 25 best performing stocks since last year's election day.

Marshall & Ilsley (MI) and Citigroup (C) are down the most since last year's election with losses of 73%.  The majority of the names on the list of losers are in the Financial sector.

Sector Relative Strength: Technology and Financials

The charts below show the relative strength of the Financial and Technology sectors versus the S&P 500.  In each chart, a rising line indicates that the sector is outperforming the S&P 500 while a declining line indicates underperformance.  We have also included dots showing each time the Fed has recently cut rates (red) or left them unchanged (blue dots).  Given the fact that the two sectors are the most widely followed sectors in the market, any meaningful rally in equities will need to see both sectors participating. 

With the overall market correcting, it is not surprising to see that Financials have been weak.  In the days and weeks ahead, it will be important for this sector to stabilize or pick up now that it has moved back down to the range it was in for much of the Summer.

While the Financial sector is lagging, the Technology sector is improving.  After peaking back in July on a relative basis, the Technology sector has stabilized and has been improving over the last two to three weeks.  If the sector can break above its prior peak, it should set the stage for an end of year rally.  Otherwise, the market will be in for more of the recent lackluster action.

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Better Than Expected Initial Jobless Claims

Today's lower than expected reading in initial jobless claims (512K) for the week ending 10/31 brought the four-week moving average down to 523.75K, which ties for the lowest reading of the year (1/10).  With nine straight weeks of declines in the four-week moving average, it's hard to argue that things aren't at least improving.

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S&P 500 Priced in Gold

With equities correcting over the last few weeks and gold rallying to record highs, the price of gold has once again exceeded the price of the S&P 500.  It now takes 0.96 ounces of gold to buy the S&P 500.  This is considerably less than the long-term average of 1.74 since 1980, and a far cry from July 1999 when it took over 5.5 ounces of gold to buy the S&P 500.  The question now is, if gold eclipses 1,100, will its time above that level be as brief as it recently was for the S&P 500?

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Asset Class Performance Since the 2008 Election

Earlier we highlighted historical market performance one-year after Presidential election days.  Below we provide a chart of how various asset classes have performed since the 2008 election.  As shown, the US Dollar has declined 10%, while the 10-Year Treasury yield has declined 6.6% (Treasury bonds have gone higher).  The Dow and S&P 500 have seen minimal gains, while oil is up 12.9%, the tech-heavy Nasdaq is up 15.3%, and gold is up the most at 43.5%.

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Crude Oil Inventories Show a Sharp Decline

Oil is getting a boost this morning following the weekly EIA inventory report which showed that crude oil stockpiles decreased by 3,963K barrels (expectations called for a build of 1,500K).  At a time of year when stockpiles are typically rising, today's inventory decline came as a big surprise.

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2008 Election -- One Year Later

Today marks the one-year anniversary of the historical 2008 election.  Since the close on November 4th, 2008, the Dow Jones Industrial Average is up 1.52%.  When you think about how far markets were down in early March, the fact that the Dow is now up over the last year is pretty amazing. 

Below we highlight the performance of the Dow one year after all Presidential election days since 1900.  As shown, the average one-year change has been 4.39%, and the average for first-term Presidents has been 6.17%.  Democratic-elected Presidents have averaged a slightly lower gain than Republican-elected Presidents but not by much.  The average one-year change for a first-term Democrat has been 7.71%, so the current gain of 1.52% following Obama's win on election day underperformed the average.  But again, compared to where we were six or seven months ago, any gain seems like a win to us.

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Was Yesterday's ISM an Early Warning For More Inflation Down the Road?

In addition to the Indian Central Bank's purchase of 200 tons of gold from the IMF, one reason for gold's strong rally today can be found in yesterday's ISM.  In each month's Report on Business, ISM publishes the results of its monthly commodities survey where it asks respondents which commodities are rising in price and which are declining.  In this month's survey, respondents saw price increases in eleven commodities and decreases in only one.  This month's net reading of +10 brought the three month moving average to eleven and is the highest level since September 2008.

The chart below compares the three month average net reading in the ISM Commodities Survey (CS) with the year over year change in CPI.  Over the last ten years, trends in the CS have often preceded moves in the CPI.  So when the net reading in the CS rises, increases in the CPI are typically not far off.  Therefore, given that the net number of commodities rising in price is currently at +10 from a low of -15 in February, don't be surprised if upcoming inflation reports come in on the high side of expectations.

 
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The Best Have Been The Worst

The average S&P 500 stock is down 6.75% since the 10/19 closing high for the index.  We broke up the index into deciles (10 groups of 50 stocks) based on stock performance from the 3/9 low through 10/19 to see how these stocks have performed during the pullback.  As shown below, the 50 stocks that were up the most during the rally have averaged a decline of 12.6%, which is the biggest decline of any decile.  Clearly investors have been selling the big winners recently.

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