Ticker Sense

Oil Is Climbing but Don't Get Suckered

Oil is up about a dollar this morning after gaining ahead of the GDP report.  At $78.86 the November contract is creeping back towards the psychological "expensive" level of $80.  While this rally is helping the energy stocks - S&P 500 energy +0.71% yesterday - don't get suckered into buying USO.  As shown in the chart below, the United States Oil Fund pays a significant premium each month when it rolls out of (sells) the expiring futures contract and into (buys) next month's contract.  Since the fund is always invested in the front month and never actually takes delivery of the physical crude, the ETF will always underperform when the commodity is in a state of contango.  In essence USO has to sell its current holdings at $78.86 and buy its new investment at $80.10 (using current prices for the November and December oil futures contracts).  

Most of the time both futures and options traders are willing to pay a higher premium for contracts expiring further into the future, therefore futures and options markets are usually in contango and any fund rolling through the front month will underperform.  USO is fine to use as a trading vehicle for a day or a week, but for any investment or trade with a time horizon of more than one month you should seriously consider the stocks.

 

S&P 500 Fibonacci Retracement

One of the more interesting and esoteric technical trading tools is the Fibonacci Retracement.  For those not familiar, the retracement breaks down a particular range into five percentiles (seven including the maximum and minimum).  The key numbers are 0%, 23.6%, 38.2%, 50%, 61.8%, 76.4% and 100% (0% and 100% are obviously the max and min).  The biggest problem we see with this kind of analysis is the fact that it is backward looking.  The chart shown immediately below illustrates the S&P 500 over the last year, with the key lines drawn. 

 

As shown, the market bottomed beautifully on the 50% line in August-07 and November -07.  The problem: a new bottom has been made since then (March-08) low and the chart as of 12/31/07 would have appeared as shown below:

Quite different, although the bottoms do still occur at one of the key lines.  Another difficulty when examining retracements is determining appropriate maximum and minimum values.  When we looked at the last year (the first chart) we see that after bottoming the S&P 500 rallied to just above the 50% line which also coincided with the 200-day moving average making a strong case for resistance.  Below we show another retracement beginning on 10/9/02; the start of the 2002 bull market as defined by Birinyi Associates.  As shown, the 61.8% line came into play at the March bottom, while the 76.4% line is currently in play as some possible support.

Our problem with this indicator is that while it looks enticing and accurate on the chart, the market rarely turns "on the line."   If we look at the chart of 2007, and say we had bought the market on the 23.6% line at 1420 on 1/4/08 our investment would have declined to 1270 (-10.5%) over the next two weeks.  In hindsight that may count as a breakdown, at the time we would have been buying on support.  Bottom line: the charts are interesting and sometimes surprising, but are less useful as investment tools.

T. Boone Pickens Is Bullish On Oil

In a CNBC interview this morning T. Boone Pickens suggested that oil may climb above $150/barrel this year, which was promptly followed by a $2 rally in the commodity.  Birinyi Associates promptly distributed a note to clients which shows that Mr. Pickens' comments should not be ignored.  His historical comments, shown below versus an oil price chart, have since been reproduced by Reuters and by CNBC. 

The VIX...Again

Our regular readers may recall a post from the end of June where we highlighted short term highs in the VIX Index and performance thereafter.  For those not familiar, the VIX Index is calculated from CBOE volatility in S&P 500 options contracts for the two months ahead.  It's underlying goal is to provide an estimate of future volatility, but for the most part we have noticed that turmoil in the present causes short term spikes in the index.  Below we highlight the VIX index over the last year, the two spikes occurred during corrections.  For historical performance after these kinds of spikes refer to our previous post.

Dow Price v. Cap Weighted

One of our readers asked yesterday about what the Dow Jones Industrial Average would look like if it was not price weighted.  Below we have recreated the index using a shares outstanding v. price weighting system similar to the S&P 500.  (The "Price Weighted" line represents the actual index.)  In order to calculate the new index, its initial price was set equal to the value of the DJIA on 5/3/06, below represents one year.  We noted that the weight of each individual stock can be quite different, but the overall performance of the index is relatively unchanged.

 

Historical Sector P/E Ratios: Part III

Below we conclude our historical sector P/E posts with charts of Health Care, Materials, Telecom and Utilities.  The grey shaded area on the Telecom chart indicates that the P/E was negative at the time.  Here are parts I and II for those interested.

Historical Sector P/E Ratios: Part II

Below we highlight Consumer Staples, Consumer Discretionary and Energy as the next three sectors in our Historical Sector P/E Charts series.  The P/E of the Consumer Discretionary sector took a dip in recent weeks as prices came in slightly and earnings remained strong.  The Energy chart clearly shows the earnings strength of the sector.  The price performance of the sector has risen sharply over the past few years, but the P/E has contracted, indicating earnings have outpaced the price rise.

Historical Sector P/E Ratios

As another post for our Charts and Tables category, we are highlighting the historical P/E ratios of the ten major US economic sectors of the S&P 500.  Below we highlight Financials, Industrials and Technology.  As shown in the charts, divergence has been created in all three sectors since the bull market began.  The P/E ratio of Industrials has continued to decline even as its price has gone up.  While Technology's P/E is much lower than it was during the bubble years, its P/E has remained flat for the past three years.  We'll be back with the rest of the sector charts shortly.

Analysts' Most Liked and Most Hated Groups

Whether you like to follow the herd or go against the grain, the following lists should be useful to you.  The first one summarizes the most popular S&P 1500 groups based on the ratings of Wall St. analysts, while the second list highlights the groups that analysts are most negative on.  Groups are sorted based on the net percentage of buy recommendations (gross buys minus gross sells) for the stocks in each group. 

The right most column in each chart shows the stock in each particular group that analysts are the most bullish (highest rated) or bearish (lowest rated) on.  For example, in Construction Materials, which is the most popular group in the S&P 1500, analysts are most bullish on VMC.  In the list of lowest rated groups, real estate is the least favorite, and within that group analysts are the most bearish on IRC.

Which strategy will work best? Buying the groups and stocks which analysts are the most bullish on (following the herd) or buying the groups and stocks which analysts are the most bearish on (against the grain)?  Only time will tell, and a month from now we will calculate the results.

 

S&P 500 "Top 25" and "Bottom 25" Lists

Over the next couple of days, we will be highlighting the best and worst of the S&P 500 based on numerous categories.  For our first installment, we take a look at share price performance (not total return) of current S&P 500 members.

The first two tables list the best and worst performing current S&P 500 stocks since the bear market began on March 24, 2000 (it ended on October 9, 2002).  XTO Energy leads the top 25 list with a whopping return of over 2,188%, while JDSU has fallen over 98%.  The list of winners is led by health care names while the list of losers is pretty much all tech and telecom.

The next two tables highlight the price performance of current S&P 500 stocks since the bull market began on October 9, 2002.  The thing that stands out the most from these lists is that only 18 of the 500 stocks in the index at the moment have seen their share prices decline during this 4 year+ bull market.

Looking at the top and bottom 25 over the last year, we see much more muted gains, as only one stock (ATI) is up over 100%.  Technology stocks again lead the list of losers.

And finally, we see that RSH and YHOO are off to a good start for 2007, while AMD continues to struggle.  Only one stock made the top 25 list for each of the time periods we analyzed: Cognizant Technology (CTSH).  Unfortunately for Micron Technology (MU), it is the only company that made all four bottom 25 lists.