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Monday Morning Outlook: Rising Anxiety as Bull Market Turns Two

Stocks finished a choppy week more or less unchanged

by 3/5/2011 12:58:57 PM
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Indicator of the Week: The Bull Market's Two-Year Anniversary
By Rocky White, Senior Quantitative Analyst

Foreword: Wednesday of this upcoming week will mark exactly two years since the Dow bottomed in 2009. Since then, the Dow is up about 85%. This week, I'll look back at other such high-flying rallies over a two-year period. Also, I'll look at some specific sectors to see which groups have and have not participated in the rally.

Dow Rallies: An 85% rally over two years is quite rare for the Dow. The table below shows each time the Dow has accomplished this feat over a two-year period, going all the way back to 1900. This is only the ninth occurrence. The table also shows how the Dow fared over the next three months, six months, one year and two years after hitting this technical milestone. The returns are summarized in the second table below.



Dow Returns After Two-Year Bull Market



Summary of Returns

After hitting a two-year bull market anniversary, the Dow has tended to continue its rally during the next six months. However, the returns are bearish in the longer term. One year after this event, the Dow averages a loss of 2.7%. Two years later, the Dow was higher only 25% of the time averaging a significant 6.3% loss.

Sector Performance: I looked at some popular exchange-traded funds (ETFs) over the last few years to compare how individual sectors performing during the 2008 crash, and since the market bottom.

Below is a table showing the best ETF returns since the March 9, 2009 bottom. Precious metals are very popular right now, so it's not a huge surprise that SPDR S&P Metals and Mining ETF (XME) and iShares Silver Trust (SLV) are on this list. SLV has been especially impressive, as it has gained about 150% -- even including the 2008 market crash.

The financial and real estate sectors have really performed well, but remember: Those sectors got crushed during the crash. I think the appearance of the SPDR S&P Retail ETF (XRT) on this list will come as quite a surprise for many people. Even if you bought at the 2007 market top, this ETF has returned a respectable 22% over the last three years.



Top-Performing Sectors During Rally

This next table shows the worst-performing sectors during the rally. Of the sector ETFs that I considered -- about 30 of them -- only PowerShares DB US Dollar Index Bullish Fund (UUP) and iShares Barclays 20+ Year Treasury Bond Fund (TLT) were down. Both of those assets were actually up during the crash. These are considered "safe havens," and money has started leaving these funds and flowing into riskier assets like stocks and commodities.

Thanks to overseas turmoil, the U.S. Oil Fund (USO) has been up over the last few weeks -- but over the last two years, the fund's returns are pretty modest compared to other assets. The Health Care Select Sector SPDR Fund (XLV) and the PowerShares DB Agriculture Fund (DBA) are also up modestly during the rally.



Worst-Performing Sectors During Rally

Below are some broader-based ETFs that I thought might be interesting to look at. Focusing on the major indexes, it's not a surprise that iShares Russell 2000 Index Fund (IWM) has performed the best during the rally -- small-cap names are typically more volatile than big-cap stocks. What's interesting, though, is that during the crash, the IWM's return was very similar to the returns of the larger-cap SPDR S&P 500 ETF (SPY) and SPDR Dow Jones Industrial Average ETF Trust (DIA) funds. The big caps, evidently, were not much of a "safe" play during the crash. The performance of iShares MSCI Emerging Markets Index Fund (EEM) is pretty similar to the U.S. index fund returns.

Last but not least, I've also included the returns of SPDR Gold Trust (GLD). Of all the ETFs I considered, GLD was the only one that showed positive returns during the 2008 crash and during the rally of the last two years.



Notable ETFs During Rally

This Week's Key Events: Fed Presidents Bookend a Light Week
Schaeffer's Editorial Staff

Here is a brief list of some of the key events this week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.

Monday

  • The economic calendar kicks off Monday with updates on consumer credit and employment trends, as well as comments from Fed Presidents Dennis Lockhart and Richard Fisher. On the earnings front, Ciena (CIEN), Urban Outfitters (URBN), Perfect World (PWRD), and Casey's General Stores (CASY) will release their quarterly reports.

Tuesday

  • On Tuesday, we'll hear the latest report on chain-store sales from ICSC-Goldman Sachs. Notable earnings reports include Suntech Power (STP), Dick's Sporting Goods (DKS), AeroVironment (AVAV), and Korn/Ferry (KFY).

Wednesday

  • Wednesday brings us word on wholesale inventories for January, the latest MBA mortgage applications survey, and the regularly scheduled update on domestic petroleum supplies from the Energy Information Administration (EIA). Meanwhile, the day's earnings docket includes H&R Block (HRB), American Eagle Outfitters (AEO), Hercules Offshore (HERO), and Molycorp (MCP).

Thursday

  • The weekly report on jobless claims hits the Street on Thursday, along with import/export data for January. Canadian Solar (CSIQ), National Semiconductor (NSM), Clean Energy Fuels (CLNE), and Smith & Wesson (SWHC) share the earnings stage.

Friday

  • We wrap up the week with the preliminary Thomson Reuters/University of Michigan consumer sentiment survey for March, along with comments from New York Fed President William Dudley. Retail issues AnnTaylor Stores (ANN) and Citi Trends (CTRN) round out the week's roster of earnings reports.

And now a few sectors of note...

Dissecting The Sectors
Sector
Automotive
Bullish

Outlook: With oil prices spiking to fresh two-year highs last week, the automotive sector was held in check -- but we would view pullbacks as buying opportunities. Fund flows in the Fidelity Select Automotive Fund (FSAVX) indicate that capital is returning to the sector following several months of outflows, which should provide lift for automotive stocks as a whole. Plus, there's plenty of room for upgrades, as nearly half of the analysts covering automotive stocks rate them a "hold" or worse. However, we would avoid domestic manufacturers such as General Motors (GM) and Ford (F) for now. Ford's CEO was recently featured on a bullish magazine cover -- and from a technical perspective, the shares are not as sound as some of the suppliers that we remain bullish on, such as American Axle & Manufacturing (AXL), BorgWarner (BWA), and Goodyear Tire & Rubber (GT). GM shares have performed poorly after the much-hyped IPO, but we do favor Toyota Motor (TM) if you are looking for a manufacturing name.
Sector
Leisure
Bullish

Outlook: Last week offered up a mixed bag for the leisure sector. A dip in the unemployment rate hinted that consumers may be growing stronger, but optimism was sapped when oil rose to a fresh two-year high. The Retail HOLDRS Trust (RTH), which had trekked higher early in the week, retreated to support near the $105 level and its 20-week moving average. Meanwhile, the SPDR S&P Retail Index (XRT) narrowed its 52-week gain to about 26%, with the index maintaining a perch above its 10-week and 20-week trendlines. Oil's spike continued to spook Wall Street pundits, with most claiming that the jump will put pressure on discretionary spending. However, with crude prices rising out of fear, as opposed to demand, we view this heavy pessimism toward the leisure sector in a bullish light. Within the group, we tend to favor Wynn Resorts (WYNN), Netflix (NFLX), and Chipotle Mexican Grill (CMG). WYNN tagged a fresh multi-year high of $132.25 on Friday, and its currently sitting on a 52-week gain of nearly 98%. However, the stock sports a short-to-float ratio of about 5%. Finally, short interest totals 8.4% of the available float for CMG, and the stock's rebound from former resistance in the $140 region could spark a rush to cover.
Sector
Coal
Bullish

Outlook: While the Market Vectors Coal (KOL) exchange-traded fund (ETF) finished Friday on a weak note, the ETF tacked on more than 3% last week, driven higher by a surge in energy prices. KOL extended its rebound from support at its 80-day moving average, and is now poised to challenge the $49-$50 region in its quest for higher ground. Speaking of which, KOL has soared more than 55% since late August. During this time frame, KOL has enjoyed the support of its 10-week moving average. On the sentiment front, analysts have grown increasingly wary of the sector throughout this rally. Specifically, the percentage of "buy" ratings on coal stocks has fallen from roughly 60% in August to about 51% at present. KOL's ability to rally in the face of this growing negativity has bullish implications from a contrarian perspective. What's more, the Energy Select Sector SPDR (XLE) ETF's International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) buy-to-open 50-day put/call ratio is currently low relative to its 2008 highs, but has turned higher recently. A rise in this ratio could indicate that investors are in accumulation mode, utilizing puts to hedge long positions.

Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.

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