Ticker Sense

S&P 500: Yet Another Cause for Concern

Those traders active in the market yesterday may have noticed that the S&P 500 did not open on time.  In fact, it was not priced yesterday until about 10:14 am.  Birinyi Associates has been concerned with systematic changes in modern financial markets, but more important is the lack of concern from the larger investment community.  There is no mention of the glitch in today's news, and the only explanation we found was that it related to a problem at the CBOE.  We stress that the inability to calculate the US market's most closely followed benchmark should be a cause for concern, especially considering the fact that nearly all trades are executed electronically (we all see the NYSE floor on CNBC every day).

Readers interested in more information may also be interested in subscribing to Birinyi's Mini-Institutional service.  In August 2007, Laszlo Birinyi published a report to those subscribers entitled "the next CRASH," which wasn't necessarily a bearish publication, but detailed many examples of systemic failures and their possible impact on the greater market.  We continue to cite examples of these failures, and must ask not if but when the next "glitch" will be more than just a confined error.

The End of the Panic, According to Bill Miller

Legg Mason's value fund manager Bill Miller released his quarterly letter to shareholders this afternoon.  Highlights include his view that the Bear Stearns sale to JP Morgan represented the "culmination" of the financial crisis.  In his view the sale ended a period of panic trading (volatility), although broader economic consequences will take longer to digest. 

Although the letter is mostly geared towards current investors in his fund, it is public and in available in its entirety here.

Re-read Old News

As we have pointed out over the last few months, analysts frequently get it wrong.  Nothing illustrates this more than Google's earnings beat yesterday afternoon.  Most analysts on the stock have issued negative outlooks, citing the economy and slowing paid clicks as reasons for reducing estimates and price targets.  We commented in a note on 2/29/08 that perhaps data regarding Google's paid clicks was being mis-interpreted, and if in fact that was the case the selling was overdone (click here for old post).  Mr. Birinyi also appeared on Bloomberg TV recently to discuss his views on the market, and mentioned GOOG as one of the two stocks he was currently buying (click here for Bloomberg story). 

See below for how Google has historically traded during the day and in the months to follow significant gapped openings.  To stay ahead of the market and keep up with Birinyi Associates' most current views and analysis, click here.

Short Term Top or Technical Coincidence?

Aside from being a volatility indicator, we believe that the VIX index should fluctuate based on market moves and not necessarily on trading or technical patterns.  Where it might be somewhat normal to see a stock bottom at its 200-day moving average, we would expect a more descriptive indicator such as the VIX to trade through moving averages as if they weren't there.

Since the July correction of last year that has not been the case.  As shown below, the VIX has bounced off its 200-day moving average twice since last July, and each time it has rallied back to highs.  (The pattern eerily resembles what technicians and chart readers call an "ascending triangle.")  It has currently bottomed on the average.

This is not to say that declines are imminent, but it is worth pointing out that the two previous occurrences resulted in declines.

Crude Oil Testing Support

Crude's recent decline has brought prices down to $100/barrel again, a price which also seems to have sentimental value to many commodity traders.  Oil neared $100 in November, December and January before speculation (and we expect short covering) pushed the commodity above $110.  The last three trading days have seen crude drop below $100, but so far is has held.  If the decline continues the next significant price is $90, although the lower end of the November - February range is $87.50.

Today's Decline, Some Comments About the Drop

Today's drop marks the fourth decline over 2% or more this year, and as most of us know there is not usually any one culprit responsible.  Many commentators have blamed AIG's poor earnings report as the catalyst (AIG's Results Reawaken Investors' Financial Fears, WSJ: 2/29) .  While that stock is down $3.40 today, we note that S&P 500 futures were only down about 12 points this morning.  Perhaps the most important news of the day was a CNBC headline discussing a possible "snag" in the proposed Ambac bailout.  On 2/25 the Dow gained 1.5% after the announcement, and today nullified those gains returning to the 2/21 closing level. 

In short, a successful bailout would incite a healthy rally, but we remain cautious because headline risk remains.

Perhaps the biggest story of the day was a posting on ComScore's blog explaining recent data about Google's web ads.  UBS said in a note on 2/26 that paid search data was negative, the analyst also lowered his price target.  GOOG opened down over $20 on the news declining from $507 to $464 in two days.  Based on today's post we would deduct that the original data was mis-interpreted and that the selling was overdone, but then again we don't make stock recommendations either.

NO MO: Lack of Momentum Leaves Market Rangebound

Since a disappointing ISM number caused a 3% sell-off on February 5th, the S&P 500 has not rallied above its level at 2pm on January 30th (coincidentally that is the date and time of the most recent rate cut).  The market lacks direction and thus has most players feeling pain.

The best advice to offer in this kind of a situation is to make up your own mind about the LONG TERM direction of the market, allocate assets and not become overly concerned with day-to-day moves.  As painful as this month may seem, the S&P 500 has been mostly flat since the third week in January.  The range shown below represents a 3.5% move for the S&P, which is also indicative of the sometimes disturbing ups and downs.

The point to take away is this: in these conditions individual investors and even small institutions can get lost in the storm.  When 1% rallies are sparked by a headline or a rumor there are certainly opportunities but carry with them a great deal of risk.

Short Term Market Warrants Short Term Trades

The current market (by that we mean from 7/6/07 to present) has been characterized by volatility, erratic trading, and a tendency to pounce on the news of the day.  Birinyi Associates published a research report last fall, as advertised several times, entitled the next CRASH, which examined the impact of new investment vehicles and fewer regulations.  Today's market requires nearly undivided attention, and long term investing is all but useless.

The first chart below shows the performance of a $1 investment in the S&P 500 on the close of 7/6/07.  Assuming you are the most intelligent trader in the world and you sold the open and bought the close of the 10 worst days since then you would be up 14%.  If you had bought and held you perform inline with the market, down 13%; if you had sold the open and bought the close of the 10 best days you would be down 31%.

So what's the point?  Between 7/6/07 and 2/6/08 there were 149 trading days, if you remove ten of those days from the picture the market is up!  Point being: in this market, when you have a profit take it.

Example number two of the benefit of short term trading was seen on 1/30/08 when the FOMC cut interest rates by 50bps.  Good news turned bad in the blink of an eye when Fitch cut their rating on FGIC.

The third example in our analysis occurred only yesterday when the Department of Justice issued an ill timed and unnecessary release that could impact CME's business model, the stock was down $100/share yesterday...

 

2008 Popular Outlook

Recently Ticker Sense submitted a poll to anyone interested in participating; thank you to all who did.  After the institutional outlooks, and the first few trading days of the year we asked our readers how they feel about 2008.  Readers were most bullish on the Dow 30, and most bearish on the S&P 500 Consumer Discretionary sector, although results for the indices as a whole were split.  The indecision reflects the current state of financial markets.  We think it explains the volatility and most likely the reason why we will remain trendless until an extreme is reached.

Beginning of Year Indication

Some analysts at the onset of 2008 have noted that a bad first day leads to a bullish year, others have said that the first five days of trading are an indication of the year ahead.  The scatter plot below shows the percent change in the Dow Jones Industrial Average over the first five days of trading versus one year performance dating back to 1915.  As shown, the trend line is sloping up indicating some correlation, but the R squared value of that trend line is 0.04 and can hardly be deemed significant.

Looking also at the first day of trading versus the rest of the year, we find that there is no correlation whatsoever.  As shown below, the R squared value is zero.  (Note that the 80% gain from the chart above is not shown in the chart below, the change on 1/2/1915 was only more recently available.)