Will The US Bond Market Continue To See The Kindness of Strangers?

Not a lot of major news this morning, other than a few earnings announcements. Priceline.com (PCLN) was the standout that I saw. The company trounced estimates by 53 cents, and its stock is spiking +17% this morning to new highs. AIG is also getting a boost from comments by Moody's that the financial giant will be able to repay its Federal Reserve credit line and much or all of the Treasury's investment if financial markets continue to stabilize.

I find it amazing that the general public is more up in arms about Goldman Sachs (GS), who regained its financial footing first, and repayed the TARP investment netting the govt. a 23% return on its investment. Would you rather the other banks follow the lead of GS or AIG?

The big event for today will be the $25 billion auction of 10-year Notes. The bears have been saying all year that foreigners are unlikely to continue to buy US debt, which will cause bond yields to soar. To date, this has not been the case. All of the bond auctions lately have been extremely well received, and the indirect bidding (foreign buyers) has been higher than expected for most of the auctions. It will be interesting to see if this trend continues for today's important auction.

The dollar is roughly flat today, as are most commodities. Oil prices are near $79.45, while gold is up slightly again to $1103.

European and Asian markets were higher overnight. Fitch said Britain is the most at risk among big economies to lose its AAA rating, of course British officials came out to downplay the risk.

The 10-year yield is lower to 3.44%; and the VIX is slightly lower to 23.05

Sentiment Indicators Point To Another Market Bottom

(Note: this post originally appeared on Sunday, 11/8)

The S&P 500 closed above its 50-day average for the 2nd day in a row on Friday, a good sign that the market is continuing to bounce from its recent oversold condition, and quite possibly has seen its lows for the near-term.

A lot of technicians have been up in arms lately, saying that the market is poised to put in a "head & shoulders" top, and that the highs for the year are likely behind us. My response the whole time has been that we can't just look at the technicals in isolation, but rather the key to timing the duration of this correction would be how investor sentiment reacted to any market decline.

The technicians said the exact same thing back in July, when it really did look like a head and shoulders top was in, but a strange thing happened on the way to Armageddon. Investor sentiment quickly grew so bearish, that the market bottomed and began to move higher. As those bearish bets became losing ones, the bears slowly began to unwind them, and that added fuel to the fire and sparked a very solid summer rally.

With year-end not far off in the distant future, I would not be surprised to see a similar scenario play out in the markets now. While not every sentiment indicator that I follow is showing high levels of bearishness, enough of them are to suggest we have seen the lows in this most recent correction. To wit,

• The AAII investor survey showed its most bearish spread between bulls and bears (22% bulls, 56% bears) since the week prior to the March lows. That's pretty surprising, and indicates just how skittish investors remain, as they jump to the bearish camp on any slight decline in the market.
  
• The Rydex Nova/Ursa ratio, which measure market timers in the Rydex funds switching from bullish to bearish leaning mutual funds, has quickly moved to its lowest level in 2 years. That means there are more market timers leaning bearish than there was in October 2008 and March of this year. You can see in the chart below that when we reached these levels in July, the market had also bottomed and rallied from there.

• In the options market, the 10-day CBOE put/call ratio has reached its highest level (0.97) since the July lows. Again, this indicates that over a multi-week period, investors have been loading up on put options either to hedge their portfolios or to speculate on further downside in the market. Either way, as these bets get unwound, it often adds upside pressure in the market.
  
• Last, the chart below shows Citigroup's Panic/Euphoria Model. This is a proprietary index that measures many different things in the market to get a sense of investor sentiment. While it is not at incredibly bearish levels, I did find it interesting that despite the record rally from the March lows, that not once has this indicator moved closed to the "euphoria" levels indicated by the upper horizontal line in the graph. If and when we eventually reach those levels, I will agree that it is time to pull in my bullish horns.

From my perch, this has been a textbook correction within a bull market. The S&P 500 looks to have left another higher low in the charts, so I wonder if that will get the technicians to change their outlooks going forward. As a portfolio manager, I know too well the feelings of performance anxiety that come when the market is rallying and you don't feel like you are fully participating. I suspect more and more managers will experience this phenomenon as year-end draws closer, and the chase for performance will drive the market to new highs for the year.

long SSO

Monday Morning Musings: Stocks Rally On G-20 Meeting, and Dollar Weakness

The market is up nicely this morning on the heels of the G-20 meeting over the weekend, where representatives reiterated their opinion that global stimulus needs to be maintained. If you looked at the futures last night, as I do, you would have seen that the markets were already reflecting this strength well before our markets opened this morning.

The dollar is also making fresh lows this morning, and as we have noted, stocks and commodities have been rallying in tandem lately on days when the dollar is moving lower. That is certainly true today, with gold spiking to new highs, oil rising back to $79, and other commodities strong as well.

The 10-year yield is lower to 3.49%; and the VIX is -2.8% lower, back below its 50-day average to 23.51. This weeks looks relatively light in terms of major earnings announcements or economic releases.

Trading comment: I had a piece up over the weekend that looked at sentiment indicators and noted how much bearishness had risen recently. I'm not sure what happened to it, so I'll have to go and repost it in a bit.

The Dow is making new highs for the year this morning, while the S&P and Nasdaq are back above their 50-day moving averages. This puts the market in good position to work its way higher, and with sentiment having grown so bearish recently, I believe that will support the market here as well. I think we are back in dip buying mode.

long SSO

Stocks Trade Lower After Jobs Data Disappoints Investors

This morning's jobs report was weaker than expected. I have been saying that the incoming economic data will continue to be lumpy, and that we should not expect a smooth upward trajectory of improvement. The payrolls report showed the economy lost 190,000 jobs (vs. -175,000 consensus). The unemployment rate also ticked up to 10.2%, the highest rate since 1983.

Those figures will not make for very good headlines, but what will not be reported is that the jobs data for the previous two months was revised higher to show less jobs lost than previously estimated. That said, the unemployment rate shows that this is still another jobless recovery, and that slack in the economy should convince the naysayers that the Fed is on hold from raising rates for a longer time than most perceive.

In earnings news, Starbucks (SBUX) reported a solid report and raised guidance, and its stock is higher. AIG also beat estimates, but its stock is nearly -10% lower today, and weighing on the financial sector.

The dollar is roughly flat, while gold has reached new highs ($1097) and oil is lower, breaking below $78. Materials and industrial stocks are bucking the weakness and leading the action so far.

Asian markets were higher overnight; the 10-year yield is lower at 3.50%; and the VIX is another -3% lower despite the sellof in stocks, hitting 24.65 which is right at its 50-day support.

Trading comment: The S&P 500 is back above its 50-day average, and holding there so far today. I will probably look to add to some long positions today, while still leaving room to add more if we get a further correction after this bounce runs it course. The market is still oversold, and I think that is acting as support and helping keep the market from falling further on a day like today when the jobs report could have led to a larger selloff.

long SSO, VXX

Retail Sales Show Some Signs Of Life At The High-end

The market is rallying this morning on the heels of several better than expected economic and earnings reports.

Cisco (CSCO) reported strong results last night, and also raised guidance going forward. The upbeat news was met with enthusiasm by investors, and is helping tech stocks lead the action so far today (particularly semis).

Retail sales also showed some positive signs, as high-end chains like Saks and Nordstrom (JWN) both posted larger than expected increases in same-store sales for October. It was the luxury market's first positive reading since May 2008, according to the ICSC. The strongest showings still came from discounters like TJX and ROSS, while the weakest areas were teen apparel companies such as Abercrombie (ANF) American Eagle (AEO), and Hot Topic (HOTT).

There were also more solid economic reports, such as Q3 productivity surging +9.5% (vs. 6.5% consensus) and unit labor costs falling -5.2% (vs. -4.2% consensus). Both of these datapoints are positive for the inflation outlook. Also, initial jobless claims fell to 512,000, down 20k from last week. The Monster Employment Index also ticked a big higher, so hopefully these will translate into a better than expected monthly payrolls report which comes out tomorrow morning.

In overseas news, both the ECB and Bank of England held rates steady at 1.0% and 0.5%, respectively. The BoE also expanded its bond purchase program by 25B pounds to 200B. Asian markets were mostly lower overnight.

The dollar is roughly flat currently, as are most commodity prices; the 10-year yield is also flat at 3.53%; and the VIX is down another -6.1% to 26.02.

Trading comment: The market is getting its oversold bounce that I was expecting, and we still have a ways to go before it gets overbought again. That said, apropos to the charts I showed yesterday, several key indexes remain below their 50-day averages, so I expect to see some resistance if and when they reach those levels. A pullback after that would probably set up a better buying opportunity than today, but I am still make short-term trades in the interim.

long SSO, VXX

What Technicians Are Worried About?

The market is getting a nice bounce today on the heels of coming off extreme oversold territory, and what looks like some relief from the elections last night that maybe the healthcare reform will be more mild, and this has the HMO stocks rallying strong.

Getting to the charts below, you can see from these three examples that many of the key indexes put in double-tops in October; they then proceeded to break below their longstanding 50-day average support; and finally, they broke below their early October lows, leaving a lower low on the charts for the first time since the rally off the March lows began.

These snapshots below are as of Friday, so these indexes have bounced a bit as of this morning, but they are still right near the resistance represented by the lower horizontal line drawn on the graphs below. The first step toward recovery will be recapturing those levels, and converting this near-term overhead resistance into support.

From there, we will need to see the major indexes recapture their 50-day averages. This morning, the S&P 500 is trading above its 50-day, so that is a start. Many of the other indexes still have room to rally before they reach their overhead 50-day averages.

I don't view all of this as ominous a sign as the bears would like you to believe. It's true that this action likely means a longer correction than we have seen in a while, but you never know. A flurry of buying could change things quicker than most expect. Most normal corrections average in the 3-6 week range. If we agree that the market topped on October 19th, than we are currently in Week 3 of this correction. That means it could end soon, or maybe chop around until we get closer to the Thanksgiving holiday.

I have said that you can't just look at the technicals alone, we also need to pay attention to what is happening with sentiment. The indicators I track do show that bearish sentiment has been on the rise, which plays into my thesis that this correction is mostly over.

Today the FOMC meets, so we could see this early rally fade, or pick up steam. These Fed days are tough to guage.

The dollar is lower today, which is really boosting commodities. Oil topped $80, and gold hit new record highs above $1095 before settling in around the $1090 level.

Asian markets were higher overnight; the 10-year yield is higher at 3.50%; and the VIX is -6.4% lower to 26.97.

long GLD, SSO

Monday Morning Musings

The market finished on a nasty note last week. I thought we would see more month-end buying, but instead it looks like it was month-end selling on the part of mutual funds, most of whose fiscal year ends occur in October.

For its part, the Nasdaq suffered its worst weekly decline since the March lows. Many leading growth stocks on the Nazz had been holding up well, but finally succumbed to heavy selling late last week. That said, the chart below shows that the Nasdaq has not been this oversold since March, and that likely means we are due for that oversold rally I have been looking for.

There were some positive economic reports this morning, and that is helping the market forget about Friday's woes. I said last week that the postive Chicago PMI should lead to stronger national manufacturing numbers. Today, the ISM Manufacturing Index for October rose for a third straight month to 55.7. This was better than the 53.0 expected, and well above last month's level of 52.6. A rising ISM has a strong correlation with job growth, so maybe we'll see a further decline in job losses this Friday.

Another solid report was the pending home sales report, which rose for an eighth consecutive month, up +6.1% in September vs. expectations that growth would be flat. This is a very strong number, but it is likely set to weaken when the first-time homebuyer tax credits expire.

The dollar is lower today, which as we have said has led to days when stocks and commodities rise together. Oil is bouncing back above $78, while gold has topped $1060 again.

Asian markets were mostly lower overnight; the 10-year yield is up slightly to 3.41%; and the VIX is -5.8% lower today to 28.90, after closing well above the 30 level for the first time since early July.

Trading comment: In my next post, I hope to take a look at the technical picture, and show you what all the technicians are currently worried about. The major indexes have broken their 50-day averages, which could now act as near-term resistance. Many corrections last in the 4-6 week are, so even if we bounce this week, the market still could need to put in more time before it is ready to run again.

We are in the midst of a correction, and one of the things I watch for is to see how sentiment turns during a correction. I am already seeing signs of rising bearishness in the indicators. I will continue to monitor these signs, and that may help give us some clues as to the duration of this correction. But big picture, this is a dip I would like to use as a buying opportunity into year-end.

Month End Not Helping Stocks In Early Trading

My colleague Doug Kass at TheStreet.com is fond of saying this market has no memory from day to day. This is very true today, after yesterday's nice bounce is starting to look like a one-day affair.

The Chicago PMI came in better than expected at 54.2 (vs. 49.0 consensus), but that did little to improve sentiment. This is a strong reading, and hopefully an indicator of better readings to come out of the manufacturing sector.

The real driver today seems to again be the US dollar. Its funny but lately all you have to ask is if the dollar is higher or lower on the day to know how the rest of the market is faring. Today, the dollar is bouncing, which is weighing heavily on stocks and commodities. Oil is back down to $78, while gold is lower near $1041.

Among sectors, financials are down the most (-3.05%), while consumer staples are holding up relatively well (-0.30%). International ETFs are also giving up much of yesterday's gains.

Asian markets were higher overnight, seemingly pleased by the strong GDP report here in the U.S.; the 10-year yield has moved lower to 3.42%; and the VIX is +8.3% higher today to 26.82, bouncing off its 50-day average that it tested yesterday.

Trading comment: This is shaping up to be a disappointing last day of the month, but I stand by my comments from yesterday. The market is still oversold, and likely due for more of a bounce. The price action and volume characteristics of that bounce should give us a better idea of how long this correction will last. Right now, the bears are pressing their bets.

Say Goodbye To The Recession

The initial estimate of Q3 GDP was released this morning, and showed that the US economy bounced back at a rate of +3.5%. This figure is better than the 3.2% consensus estimate, and well above the 2.7% whisper number that Goldman's economist floated yesterday, that may have weighed on the market a bit.

This was the first positive GDP reading since Q208, after a string of four consecutive negative readings. If you're being technical, I believe this marks the official end of the recession, but the NBER will come out and make that determination sometime down the road, probably when it doesn't really matter to most people anymore, lol.

I have been writing about the economic bottom since March, when the stock market bottomed and I suggested that although the economic numbers would still be negative, they would begin to get "less bad" on their way to eventually turning positive. That subtle rate of change was the catalyst behind the big stock rally, and I think the magnitude of said rally could indicate that the economic rebound will indeed turn out to be stronger than most expect.

The naysayers will say that too much of the GDP bounce came from govt. assistance, in the form of 'Cash for Clunkers' and the homebuyer tax credits. This may be true, but that doesn't mean that the economic rebound can't still become self-sustaining post stimulus. Inventories were drawn down again in Q3, and when inventories actually start to get built back up, it will provide a strong boost to the economy.

The ECRI has had a very good track record of calls on the economy. Right now, their Weekly Leading Index is just off its highs, and indicating that the economic recovery is going to be strong. They also said that the odds of a double-dip are low right now. I'll bet on the ECRI versus the Wall St. economists.

The dollar is lower today, after its own 5-day rally. This is boosting stocks and commodities. Oil is up $1.50 to $79, while gold is up over $7 to $1038. The materials sector is the biggest winner so far today, while defensive utilities are lagging.

Asian markets were lower overnight, despite the IMF raising its economic growth forecast for the Asian economies; the 10-year yield is higher to 3.48%; and the VIX is -8.3% lower to 25.59.

Trading comment: I put some money to work on the long-side yesterday, after a 4-day slide that brought the market deep into oversold territory (oscillators). This also coincided with month-end, so the odds of a bounce were fairly high.

That said, I would like to see what this bounce is made of before I commit too much. If this is simply a low-volume bounce, with many leading stocks only able to make lower highs vs. last week, then this correction could have more to go. I do not think there is huge downside risk, sometimes corrections just need more time to run their course.

Fourth Day of Dollar Bounce Weighs On Stocks

The chart above shows the US dollar etf (UUP), which tracks the direction of the dollar relative to a basket of other currencies. You can see the long slide that the dollar has endured, but this has coincided with a rise in the stock market.

For the last four days, the dollar has been bouncing, and that has weighed on stocks, hitting the energy and materials sectors especially hard. It may seem counter-intuitive, but in this environment stocks rally on the weak dollar and pullback when the dollar is rising.

You can see that this recent bounce has been accompanied by a huge surge in volume, indicating that investors are betting that this latest move has some legs to it. I am less certain, and think that the dollar will likely run into resistance again and continue its slow slide.

This morning, the durable goods report came in a little better than expected, but the new home sales data was below expectations. I have commented recently about the lumpiness of the home sales data, and today is an example. I also put a little more weight in existing home sales vs. new home sales.

The stronger dollar is weighing on commodities, with oil prices down near $78 and gold flat around $1034. Asian markets were lower overnight; the 10-year yield is lower to 3.46%; and the VIX is +5.6% higher today, extending its recent rise to 26.25.

Trading comment: The S&P 500 is lower for its fourth straight day, and this morning touched its 50-day average at 1050. This coincides with an oversold reading in the oscillators, at the same time we are approaching month end. I think there is a good chance we could see a bounce from here, as investors step in at the 50-day average and also put money to work (window dressing) ahead of month end.

long SSO

Monday Morning Musings

The market was much higher in early trading, but the S&P 500 ran into resistance again near the 1090 level, and stocks have pulled back considerably from there such that the major indexes are now back in negative territory on the day.

One of the big laggards today is Bank of America (BAC), which is rumored to need to raise more capital to get out of their TARP loans. This is weighing on the stock, which is currently -5% lower. BAC has a solid Tier 1 capital ratio at current levels, and I think any capital raise they might do will provide a good buying opportunity for the stock.

The market is already back in oversold territory, especially the Nasdaq. So while we could see another down day or two, I think the market is more likely closer to finding support.

The dollar is bouncing today, which is also weighing on stocks, as lately stocks have been rallying on days the dollar slides. Crude prices were up but are now lower, breaking below $80. Gold prices are also lower now, falling to $1053.

Asian markets were higher overnight; the 10-year yield is higher to 3.53%; and the VIX was lower but has also turned higher, now up +7% to 23.84.

long BAC