Today's in-depth look at the week ahead begins with a recap last week's historic 5-day gain for the Dow Jones Industrial Average, despite the Thursday Thanksgiving holiday. Next, Schaeffer's Senior Vice President of Research Todd Salamone looks at the potential for solid market returns following the S&P 500 Index's (SPX) impressive 12% rally. Joe Sunderman, Vice President of Financial Market Analytics, dives into the Nova/Ursa ratio, and why you should keep a close eye on this sentiment indicator. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week.
Recap of the Previous Week: The Dow Jones Industrial Average Posts Best 5-Day Point Gain Ever By Joseph Hargett, Senior Equities Analyst
Last week was one for the record books for the Dow Jones Industrial Average (DJIA). Despite the shortened-holiday week, the Dow gained 1,277 points, or 17%, in just 5 sessions, marking its best 5-day percentage gain since 1932, and its best 5-day point gain on record. The venerable average kicked last week off with a bang, rallying 396 points, or 4.93%, after word hit the Street that the U.S. government would bailout Citigroup (C), thus dodging another Lehman Brothers-style collapse. Tuesday's gain amounted to just 36 points for the Dow, but it kept the streak alive despite a downwardly revised third-quarter gross domestic product and news that the Federal Reserve would buy up to $600 billion in mortgage-backed securities.
Traders regained their footing on Wednesday, as the Dow jumped 247 points, or 2.91%, heading into the Thanksgiving day break. The rally wasn't easy, however, as traders fought their way past the sharpest drop in consumer spending since September 2001, the fastest contraction in durable-goods orders in 2 years, and a 25-year high in the 4-week moving average of initial jobless claims. Wall Street was "closed" on Thursday for the holiday, but traders returned with sated appetites on Friday. Despite anxiety over a potentially weak showing for Black Friday, the Dow rallied 102 points, or 1.17%, bringing the average's gain to 9% for the week. Still, the impressive 5-day rally wasn't enough to save November, as the DJIA dropped 5% for the month. Elsewhere, the S&P 500 Index (SPX) added 12% for the week, but lost 7% for the month. Finally, the Nasdaq Composite (COMP) rose 11% last week, but shed 10% for November.
What the Trader Is Expecting in the Coming Week: Does an Historic Weekly Return Indicate Continued Market Strength? By Todd Salamone, Senior Vice President of Research
The S&P 500 Index (SPX) rallied 12% last week, raising an interesting question: When did we last see the SPX exceed a weekly rally of 7%, and what happened during the subsequent months? I'll answer this question in a moment, but first, let's rewind to the week that preceded this historic 1-week return in the SPX.
Two weeks ago, we experienced a 6.7% decline in the SPX, but an impressive late-Friday surge broke the selling fever on Wall Street, as news hit that President-elect Barack Obama would name Timothy Geithner as his Treasury Secretary. As a result, the SPX rallied back above its 2002 lows at 768.63 and its October 2007 half high at 788.05. As I mentioned in last week's Monday Morning Outlook, the late-Friday rally from 2 weeks ago put the bulls back on life support. I discussed the 3 consecutive days in which the International Securities Exchange all-equity call/put ratio fell below 1.0, and the fact that the CBOE Market Volatility Index (VIX) traded at a premium to its 20-day historical volatility for the first time since October 10.
As we now know, that build-up in short-term fear preceded announcements from President-elect Obama regarding members of his economic advisory team. Moreover, and perhaps more importantly, the government came out with 2 additional measures last week to ease the credit crisis: the $200-billion term asset-backed securities loan facility to help unclog consumer and small-business-related loans, and the $600-billion government-sponsored entities purchase program designed to target mortgage-backed securities at Freddie Mac and Fannie Mae. The latter action pushed mortgage rates down, with the benchmark 30-year fixed rate at 5.76% heading into Friday, down from 6.77% only 4 weeks ago. Plummeting mortgage rates are the first major tailwind for the housing sector in quite a while.
The culmination of this bottled-up fear in the market and the government action resulted in a huge rally in the SPX last week, further justifying our advice about positioning oneself for an "anything can happen" outcome. Historically, the bulls can garner some encouragement from last week's price action. When the SPX notches a 1-week gain of 7% or more, the following 3 weeks to 3 months have proven extremely bullish for stocks. Specifically, the SPX returns, on average, between 2.47% and 9.13% during the 3-week to 3-month time frames following a 7% or greater move.
So, could we see a repeat of these types of returns in the weeks and months ahead? Most certainly, as we saw some heightened fear ahead of a catalyst that created a tailwind for the housing and refinance market. At the same time, keep in mind that volatility in the market is at historic highs, so exaggerated short-term moves may be less meaningful in their implications. Moreover, the new measures designed to address asset-backed loans and mortgage-related securities are not due to launch until February 2009.
With the aforementioned tailwinds in mind, the issue of hedge-fund redemptions still looms. In the blink of an eye, forced selling could once again engulf the market, sending stocks spiraling lower. As we enter this week, we see potential resistance for the SPX at the 965 level, site of its 50-day moving average. Last month's high at 1,000 is also a level at which sellers could emerge. On the downside, the 850 level on the SPX could be supportive on pullbacks, as this marks the site of the October lows. Should 850 break, we would prepare for a retest in the 768 or 788 levels, site of the 2002 low and half-high of October 2007, respectively.
If you are looking for a sector to dip your toes in on the long side, we would recommend the housing sector, with stocks such as Meritage Homes (MTH) and Toll Brothers (TOL) rising to the top. Meanwhile, continue to avoid energy, technology, and pharmaceutical stocks.
Indicator of the Week: Nova/Ursa Ratio By Joe Sunderman, Vice President of Financial Market Analytics
Background: A sentiment indicator that we monitor each day is provided by the Nova and Ursa funds from the Rydex Series Trust. The Nova fund is designed to have a target beta of 1.5. In other words, using equities, stock index futures contracts, and options on those securities and futures, the fund has a target performance benchmark equal to 150% of the S&P 500 Index (SPX). Traders who invest in this fund are considered bullish on stocks. Meanwhile, the Ursa fund is designed to provide a performance inverse to that of the SPX by using a combination of short selling and options on stock index futures. Investors in this fund are considered bearish on stocks.
Data Interpretation: We can get an accurate view of the sentiment picture by comparing the amount of assets in each fund. Specifically, we divide the total adjusted assets in the Nova fund by the total adjusted assets in the Ursa fund to arrive at a Nova/Ursa ratio. A high Nova/Ursa ratio indicates an extreme amount of optimism (everyone investing in Nova – bullish fund). A low Nova/Ursa ratio indicates an extreme amount of pessimism (everyone flocking to Ursa – bearish fund). We have frequently found that lows in the Nova/Ursa ratio precede rallies in the SPX, while peaks in sentiment will often front run a decline in the index.
Current Reading: Below is a graph of the Net Asset Value Adjusted Nova/Ursa Ratio. The current reading for this sentiment measure is 0.89, meaning the adjusted assets of the Nova Fund amount to 89% of the adjusted assets in the Ursa Fund.
Implications: Concerning us at this moment is the promptness of Rydex fund speculators moving assets from Ursa Funds (bearish fund) to Nova Funds (bullish assets). Our interpretation of the data is that fund traders are looking for a bottom too readily. As seen by the previous peaks in the data (circled areas on graph), this level of optimism (as defined by the Nova/Ursa ratio) has been ill-timed the past several months. Given that the market is "overbought" by Relative Strength Index (RSI) measures, and the Rydex herd moving into bullish funds, we recommend defensive positioning following last week's bear-market rally. As Bernie Schaeffer has mentioned in the Option Advisor commentary, "I would remain quite defensive, looking to hedge any long stock exposure with shorts or with put positions on ETFs, including the "double inverse" ETFs on such still-vulnerable sectors as energy and technology."
This Week's Key Events: November Nonfarm Payrolls on Tap By Joseph Hargett, Senior Equities Analyst
Here is a brief list of some of the key events for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with the respective company websites for official reporting dates.
Monday
The economic calendar starts off light on Monday, with the release of October's construction spending report and the November Institute for Supply Management's (ISM) manufacturing index. In earnings news, Inergy (NRGY), Linktone (LTON), and Shanda Interactive (SNDA) are scheduled to release their quarterly reports.
Tuesday
Wednesday
Thursday
Friday
And now a few sectors of note...
Discuss this article:
Post your own comment
More articles:
That was a close one! It came down to the wire on Friday, but the Dow Jones Industrial Average (DJIA) managed to rally back nearly 200 points and eke out a close above 10,000 for the week. Growing concerns about European sovereign debt and a less-than-inspiring January nonfarm payrolls report were at least partly to blame for last week's turmoil. Looking ahead to next week, Todd Salamone, Senior Vice President of Research, examines key technical support and resistance levels for the S&P 500 Index (SPX). He also drills down on several sentiment indicators, and explores the potential for a buying opportunity in the current market environment. Next, Senior Quantitative Analyst Rocky White takes a look at the December lows indicator, and examines the theory that the market is in for a rough year if the prior December's lows are taken out. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week. read more...
Whoops. The Dow Jones Industrial Average slipped another 1% last week, following on the heels of its 4.1% swoon the previous week. That helped add up to a 3.5% loss for the month of January, the worst performance for the blue-chip index since February 2009. Looking ahead to next week, Todd Salamone, Schaeffer's Senior Vice President of Research, is looking for bullish signs, but he concedes that the technical backdrop has weakened considerably. He notes, for example, that the S&P 500 Index has broken below its 80-day moving average for the first time since the March 2009 bottom. Next, Senior Quantitative Analyst Rocky White takes a look at the January Barometer -- whether the market's performance in January foretells the rest of the year -- and doesn't much like what he sees. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week. read more...
That was not fun. The Dow Jones Industrial Average suffered its worst week in nearly a year, effectively wiping out 2010's gains. Earning reports failed to provide much lift, the Chinese are threatening to tighten lending policies, jobless and housing figures disappointed, and the banking sector is worried about President Obama's financial reforms. Looking ahead to next week, Todd Salamone, Schaeffer's Senior Vice President of Research, says that the current pullback mirrors similar action from the October 2009 earnings season. Next, Senior Quantitative Analyst Rocky White notes that Friday's big decline was the fifth day in a row that the Dow moved at least 100 points. He takes a look at what happens when the Dow moves up or down in a big way two days in a row. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week. read more...
Expiration week -- which historically has a positive bias -- fell to the bears on Friday. The pullback was especially notable due to the fact that the S&P 500 Index (SPX) was rejected at the 1,150 level, an area that is being closely watched by technical analysts. Last week also kicked off the start of fourth-quarter earnings season, but Alcoa Inc. (AA) forgot to bring the party supplies. The Dow Jones Industrial Average (DJIA) followed the blue chip's lead, and headed lower on the week. Looking ahead to next week, Todd Salamone, Schaeffer's Senior Vice President of Research, analyzes the volatile start to the fourth-quarter earnings season, and considers some long-term technical indicators. Next, Senior Quantitative Analyst Rocky White takes a closer look at the negative reaction to Alcoa's earnings miss, and examines the potential impact on the market as a whole. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week. read more...
After ringing in the new year with a 1.5% bang in the first trading day of 2010, traders promptly went back to sleep for the rest of the week. Even employment reports from ADP and the U.S. Labor Department were unable to hold sway on Wall Street for very long, and the Dow Jones Industrial Average (DJIA) eventually closed just 35 points higher than Monday's close. Looking ahead to next week, Todd Salamone, Schaeffer's Senior Vice President of Research, notes that fourth-quarter earnings season kicks off, and looks back at how earnings reports were received in July and October of 2009. Next, Senior Quantitative Analyst Rocky White drills down on the market's reaction to monthly employment data and the potential impact of last week's nonfarm payrolls data on S&P 500 Index (SPX) returns in the following week. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week. read more...
Auld Lang Syne, indeed. What a year! The meltdown that began in September 2008 continued into March 2009, with major market indexes sinking to levels they hadn't seen since the late 1990s. That's when the bulls started their nine-month charge. Although the final week of the year was a downer, especially on the final day of trading, the year clearly went into in the "W" column. Looking ahead, Todd Salamone, Schaeffer's Senior Vice President of Research, notes that technical speed bumps still exist as sentiment shifts. Next, Senior Quantitative Analyst Rocky White takes a closer look at the performance of the S&P 500 Index during the first five trading sessions of the new year and its implications for the 12 months ahead. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week. read more...
Santa Claus came to Wall Street a little early this year, as the major market indexes edged higher on strong earnings and positive economic reports. All three major market indexes finished the holiday-shortened week at their highest prices of 2009. The Dow finally cracked the 10,500 level, although it was on light trading volume, casting this strength in a small shadow of doubt. Regardless, the market finished the week firmly in positive territory, leaving investors to a long weekend filled with holiday cheer. Looking ahead, Todd Salamone, Schaeffer's Senior Vice President of Research, notes that sentiment may be shifting among options players. Next, Senior Quantitative Analyst Rocky White takes a closer look at the "lost decade," and what it means for the Dow following a weak 10-year period. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week. read more...
Can you say trading range? The Dow Jones Industrial Average (DJIA) was rejected once again by overhead resistance in the 10,500 region, only to find support at 10,300 by the end of the week. Despite a brief trip above the upper rail of this range on Monday and flurry of excitement for the bears on Wednesday and Thursday, the Dow was largely comatose last week. Looking ahead, Todd Salamone, Senior Vice President of Research, notes that index option premium sellers have enjoyed the recent flat environment, and he thinks there may more of the same to come. Next, Senior Quantitative Analyst Rocky White gets in the holiday spirit by taking a closer look at trading activity during the weeks of Christmas and New Year's. According to Rocky's data, you may want to break out the (bull)horns (not reindeer) and party like it's 2010. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week. read more...
When is a better-than-expected U.S. jobs report a negative for Wall Street? When it brings with it the threat of an earlier-than-expected interest rate hike. Such was the dilemma that plagued traders last week, even as a cadre of officials ranging from Fed Chair Ben Bernanke to Treasury Secretary Timothy Geithner attempted to assure them that the U.S. economy is in no shape to support a hike for the time being. Oddly enough, downplaying the economic recovery bolstered traders, with the Dow Jones Industrial Average (DJIA) climbing 0.8% by Friday. Still, the Dow has been stuck under the 10,500 level for a month. Looking ahead, Todd Salamone, Senior Vice President of Research, takes a look at the recent trading ranges on the S&P 500 Index (SPX) and the Russell 2000 Index (RUT). He thinks both indexes might be pinned to current levels in the upcoming expiration week. Next, Senior Quantitative Analyst Rocky White takes a closer look at the current Investors Intelligence survey readings and what they tell us about the market's trajectory. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week. read more...
News of credit trouble out of Dubai shattered the quiet of the holiday-shortened week on Friday, ending the Dow Jones Industrial Average (DJIA) winning streak at three weeks. Looking ahead, Ryan Detrick, Senior Technical Strategist, makes the case for a continued run higher by the bulls, although he acknowledges some short-term technical hurdles. Ryan's contrarian mindset is cheered by the continued skepticism in the face of the huge bull run of 2009. Next, Senior Quantitative Analyst Rocky White takes a closer look at the overall performance of the S&P 500 Index (SPX) following the release of Black Friday's sales data. Finally, we wrap up with a look at some key economic and earnings reports slated for release this week. read more...
Today's Most Popular Stories
working... 
