Ticker Sense

Market Volume - Expect a Contraction

Several weeks ago Citigroup announced their intention to undergo a 1 for 10 reverse stock split.  The ex-date on the rerverse split is not yet determined, but the implications on total market volume should not be ignored.  The technical folks like to point to market volumes as a signal indicating the importance of market advances and declines, but do not be alarmed if there is a sudden contraction in trading volume after Citi's share price jumps from $4 to $40.

The chart below shows Citi's daily volume as a percent of total NYSE volume.  In a special note to paying customers, Birinyi Associates detailed that - all things being equal - Cit's reverse split will cause total NYSE daily volume to decline by about 11%.  Although we still do not know the exact dates, be wary volume as an indicative measure.

 

Companies with Exposure to Japan

With the turmoil and crisis that continues in Japan, we have had many inquiries into its potential impact on US equities.  Based on quarterly and annual earnings reports Birinyi Associates has compiled a list of large US corporations that receive the largest portion of their annual revenue from Japan.  Freeport-McMoRan (FCX) has by far the largest exposure at 18.06% of the total, with Texas Instruments (TXN), Weyerhaeuser (WY) and Qualcomm (QCOM) at just under 10%.  

The market appears to believe that FCX will benefit in the long-run, as its stock has risen 6.80% since 3/14.  Whereas NKE might be the biggest loser, down 11.35% over the same period.

Natural Disasters and the Market

From the looks of it the world is going to watch Netflix (+3.66%) movies on televisions powered by First Solar's (+4.91%) panels for the foreseeable future.  These two stocks are the only S&P 500 names gaining amid the 2.50% decline this morning.  The decline is not surprising, following Japan's 10.55% sell-off and general global anxiety for a variety of reasons: civil unrest, sovereign debt, earthquakes, a tsunami and potential nuclear catastrophe... take your pick.  

For additional perspective we took a look at some of the more significant natural and man made disasters over the last sixty years.  Some of the events were admittedly "cherry-picked." Both the Chernobyl disaster in the Ukraine and Hurricane Katrina in the US resulted in comparatively minor loss of life, but the psychological and financial impacts were perhaps more significant.  

As shown, the performance following such events is mixed.  Hurrican Katrina had relatively little impact on stocks, whereas Chernobyl resulted in a 3.1% decline over the following week.  On average the S&P 500 is down 2.75% over the following six months; excluding the Myanmar cyclone and the 2008 Chinese earthquake stocks gain an average of 3.48%.

Strongest S&P 500 Gain Ever

As of 2/18/11 the S&P 500 was up 98.5% over 494 trading days.  We took a look back at the market's history and calculated nominal returns over 494 trading days on a rolling basis since 1945.  Those rolling returns are plotted in the chart below, with the red dotted line representing 2/18/11.  As shown, this is the strongest gain over similar periods in the S&P 500's history.  (There is pricing available for the S&P 500 prior to 1945, but Birinyi Associates has found those prices to be unreliable.)

Overbought 31 Consecutive Trading Days

If you feel like the stock market has been defying gravity, you're right.  The S&P 500 has been overbought for 31 consecutive trading days as part of a continuous rally that began on 12/1/10.  While this type of gain is certainly not the "norm," there are 42 instances since 1945 where the S&P 500 has had longer winning streaks.  As recently as 11/12/10 the market was overbought for 45 consecutive days, and in 1961 it was overbought for 94 consecutive days!

The conventional wisdom is that what goes up must come down, therefore an overbought stock or index is a better sell than a buy.  When we analyzed the average returns of the 46 periods similar to this one, and found that over the next three and six months the S&P 500 has a 74% chance of gaining, and the average gain over six months is 4.74%.  (click the image below to enlarge it)

S&P 500 Sector Relative Strength

There was definitely some posturing in today's market to ring in the new year.  Family favorites like Priceline and Chipotle posted strong gains, while Las Vegas Sands and MasterCard reversed morning gains to close down.  In the end the financial sector was by far the strongest winner, up 2.3%, with telecom second at +1.4%.  

Take a look below at Birinyi Associates' relative strength charts for the ten S&P 500 sectors.  These charts can be very helpful in picking out broader market trends, especially when it comes to allocating assets.  Materials and energy names are the clear winners over the last three months, while the industrial and discretionary sectors have slowed after a blockbuster year in 2010.  The financial sector has picked up significantly in recent weeks and has posted the strongest relative performance over the last month.  

Large Caps Outperform While Small Caps Stumble

The Wall Street Journal featured our research in today's paper, highlighting the shift from small cap leadership into large cap.  Click here for a link to the full article.  Below are more details on the analysis.

The chart below shows the Russell 3000 performance across ten groups.  Group 1 contains the smallest stocks by market capitalization, while group 10 contains the largest stocks.  As shown, the smallest stocks gained an average of 359.55% between 3/9/09 and 8/31/09, more than double the next-best group.  The largest stocks were the worst performers during that period, gaining an average of 58.73%

If we now look at the period between 8/31/09 and 11/10/09 exactly the opposite trend has occurred.  The largest stocks in the Russell 3000 performed the best, gaining an average of 7.48%, while the smallest stocks performed the worst, losing an average of 1.50%.

While we can't necessarily call this a "shift to quality" (since we're not really sure how you define "quality"), it does highlight risk aversion in the market as blue chips outperform more volatile small caps.

The same trend holds true for index returns.  Between 3/9 and 8/31 the Russell 2000 was the best performer, up 66.66% vs a 45.05% gain for the DJIA.  Between 8/31 and 11/10 the DJIA performed best, gaining 8.67% compared to the Russell 2000's gain of 3.77%.

S&P 500 Long Term P/E Ratio

Warren Buffet's encouraging op-ed in the New York Times today may have inspired some buyers this morning, but after a world-wide credit crisis, weakening home prices, and the crumbling of several of the world's most prestigious financial institutions, how much will investors really be willing to pay for earnings.  Shown below is the 12 month trailing P/E ratio for the S&P 500, its current level and the 5 year average.  The average has been declining since the first quarter of 2004, where it peaked, but this could also be a cyclical signal that earnings will have to become much more robust before buyers are willing to bet on future earnings.  A quick recession that's over before it starts (on an announced basis) would be encouraging.  In any case, the market's P/E ratio is still above its long-term lows, but below any kind of inflated state and continued healthy earnings (like those of Google and IBM) will be a long term positive once the fear leaves the market.

New Sector Leaders Emerging?

After Monday's huge gain there were some sectors that had follow through rallies yesterday, and some that did not.  The chart below highlights the ten S&P 500 sectors and their gains both on Monday and on Tuesday.  As shown, the financial sector had the largest gain during Tuesday's market decline, but the energy sector has had the largest total gain since the market's recent bottom.

Click here to learn more about in-depth research provided by Birinyi Associates.

S&P 500: Still OVERSOLD!

Even though the market rallied 11% yesterday, the S&P 500 is still oversold!  As shown below the S&P remains more than two standard deviations below its 50-day moving average.