Ticker Sense

Financials at a Low, Energy Bounce: Birinyi's Top-down/Bottoms-up Analysis

Birinyi Associates' monthly newsletter, Reminiscences, equips readers not only with detailed market commentary, long term views, stock ideas and model portfolios, but has also introduced several ways to analyze the S&P 500 sectors.  Shown below, the S&P 500 financial sector recently bounced off its theoretical low.

Also highlighted is detailed sector information with year-to-date and month-to-date performance, upgrades and downgrades by sector, changes in price target and EPS estimates, as well as the best and worst stocks for the month and the year.  Based on performance, earnings, price target, analyst ratings and changes Birinyi ranks the S&P 500 sectors highlighting the best and worst.

Included in this month's issue is a summary the upcoming earning's season.  The largest stocks to report, when they report, changes to their estimates and the stocks' average performance on an earnings report.

Click here here for more information and subscription details.

S&P 500 Sector Trading Ranges

Shown below are the S&P 500, DJIA and the ten economic sectors making up the S&P 500.  Both the S&P and the Dow encountered strong resistance at their 200-day moving averages and quickly retreated below their respective 50-day averages.  The Dow remains oversold while the S&P has traded up into the bottom of its range.  Technology and materials have tried to re-establish an uptrend, but the only consistent winner is energy (red 200-day trending up). 

For more information regarding trading ranges for sectors, industry groups and individual stocks; including theoretical extremes and standardized daily price moves, click here to learn about more products and services offered by Birinyi Associates.   

US Markets, Sectors and the Dollar; Several Reasons To Be Cautious

Taking another look at our market and sector trading envelopes, we see that the S&P 500 has encountered some overhead resistance at the 200-day moving average.  In addition, the market is overbought and the dollar is weaker after short-term strength (see below).  The next several days will likely see cautious trading (sideways to negative prices) as investors still seem uncertain about the future.

Reasons to be cautious:

• Financial company EPS estimates beginning another round of downward revisions.
• As shown below, the dollar is at the top of its down-trend.
• The S&P 500 and DJIA are overbought.
• Leading sectors (tech & energy) are more overbought.

Expected S&P 500 Impactors: Bottoms-up Forecasts

Based on closes as of 5/13/08, the majority of analysts covering large-cap equities expect technology stocks to move the market the most over the next six to twelve months.  The consensus price target is the average of each analyst's target price on each S&P 500 stock (currently there are over 8,000 data points).  Based on the underlying targets, analysts expect the index to gain just over 13% from its current level of 1403. 

The tech sector is expected to gain 15.48% and account for 35.4 of the S&P's expected 183 index points over the next year.  Health care and financials are expected to add 29.2 and 26.0 points and gain 18.63% and 11.20% respectively.  On another note, the tech sector is nearly the largest component in the S&P, trailing financials by only 26bps in terms of market weight.

Readers interested in more information regarding sector and group impactors, including the most and least liked stocks in each sector, may also be interested in Birinyi's Mini-institutional service.

S&P 500 Index & Sectors vs 52-Week Highs

The chart below highlights the percent different between the market and sector's current prices and their 52-week highs.  As shown, financials have declined the most since their peak on 5/23/07, down 29.7%.  Also shown is the number of days from the high.  Based on that information the health care, telecom, and consumer discretionary sectors all peaked at about the same time as financials, while energy and materials have set new highs much more recently.  See our previous post for 6mo sector charts and trading envelopes.

S&P 500 Sector Trading Envelopes

With talk of a possible bottom, definite strength in the US stock market, and potential reversals from technology and consumer stocks, we revisit a favorite measure of Birinyi Associates.  Below we highlight the trading envelopes for the S&P 500, DJIA and the ten S&P 500 economic sectors.  As shown, technology and financials, which had been in steep declines, are now both more than 10% off their lows.  The consumer discretionary, health care, and utilities stocks remain in a bearish cycle (10% or lower off their highs and less than 10% above their lows). 

As of yesterday's close, sectors that are overbought include: S&P 500, DJIA, financials, technology, industrials, energy, consumer discretionary, telecom, and utilities (7 of 10).  Health care, consumer staples and materials are neutral, no sectors are oversold.  When the market and more than half of the sectors are overbought there is reason to be cautious, that situation does not usually provide a short term buying opportunity.

U.S. Universe Performance by Industry

Using the same universe for the U.S. investable market (excluding stocks that did not trade between 12/31/07 and 4/22/08) as the following study, we break down performance by industry below.  The figures as shown are sorted with the largest group at the top.  Oil & Gas, having a market capitalization of $1.6 trillion and consisting of 184 stocks, has been one of the best performing groups this year, with the average member up 9.49%.  The stocks doing best on average are the 8 stocks in the Tobacco group, which has a market cap of $87.5 billion (note that only Altria's market cap of $46.5b was included, Philip Morris International was excluded from the study).

The worst stocks have been Airlines, those 18 names were down 33% on average, and the average U.S. stock is down 9.9% for the year.

   

S&P 500 Sectors Year-to-Date

As of yesterday's close the S&P 500 was down -8.66% for the year.  The telecom sector has been the worst performer, down -15.32%, and materials have performed the best but are down -2.04%.  For the S&P 500 members, 379 stocks are down and 122 are up.  Of the stocks posting gains, WMT, IBM, DVN, and EOG have helped the market the most; while MSFT, GOOG, AAPL, XOM, and C have lead the decline.  There are 64 active industry groups in the S&P 500 right now; 13 have posted gains, and one of them is up over 10%.

For more detailed sector, industry, and stock analysis try Birinyi Associates' Mini-Institutional service.

The SEC Uptick Rule Change: Bad Timing for a Bad Idea

Jim Cramer is currently discussing the SEC's change in the "uptick rule" for short selling.  Ticker Sense and Birinyi Associates has focused on this rule change since November 15, 2007 when we first highlighted that this rule change was causing fundamental changes in market activity. 

We continue to agree with Mr. Cramer, although we may say that he now agrees with us.  Nothing illustrates the underlying change better than the peak in Dow's non-block money flow chart.  Birinyi Associates is known for its money flow analysis, which is an analysis of each transaction in a stock and shows underlying activity behind seemingly small price moves.  As shown, the Dow's money flow peaked in July of 2007 and has declined ever since.  Short sales that can now be executed on any trade have caused the money flows to turn and this is also a reflection of the rule's impact on market activity.

In addition to the dramatic declines in money flow, the VIX and average daily change for S&P stocks have also increased since then.

Changing the uptick rule certainly did not cause the subprime meltdown, and would not have prevented a decline, but it has caused increased volatility and declines in stocks that would not have been so dramatic.  In essence, short sellers are now able to sell stock that did not previously exist.  While there is a buyer for the stock, essentially increasing the number of shares outstanding and offering those shares at a discount has caused stocks to fluctuate wildly.  Since large amounts of capital are required to play this high-stakes game, many players have been driven out of the market.  Investors have taken refuge in gold (peaked at $1,000/oz), and treasuries (10y yielding 3.31%). 

Investors interested in this kind of market insight well ahead of its appearance on CNBC should consider investing in one of Birinyi Associates' research products detailed here.

Market Breadth

Posts have been light recently because the insight we can offer comes as more in-depth research that does not lend itself to a blog post.  Short-term market analysis seems to be almost useless, since any conclusions are squashed by whatever news the market decides to pounce on that day. 

The chart below shows that little attention has recently been paid to stock picking, but more that traders jump on the back of the market and drive all stocks down together.  Birinyi Associates measures market breadth as the number of advancing names minus the number of declining names.  The typical universe is the S&P 500, where extreme market breadth has been defined as a one day reading of + or - 450. 

As shown, the current period has had the most extreme days since 2002.