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Foreword
"Last Week in the Markets..." is an examination of the week that was in the financial markets, in an effort to help assess the prospects for the week(s) that will be.
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Summary
Stocks took a strong tumble last week, partially in anticipation of the possible negative impact over the weekend of Hurricane Rita. But since Rita was only bad instead of horrendous, it's time for stocks to resume their "be happy, don't worry" mode. For how long, though?
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* Hurricane Rita, much hyped going into last weekend for its possible horrible impact, wasn't nearly that bad (unless you live in eastern Texas or western Louisiana.) Therefore, it's time for the stock market to stage a Rita "relief rally."
* In a recap of what stocks did last week. The GRA tracking group fell an average 2.0%, with a similar median decline of 1.9%. All seven components were down, with losses running in a range of 1.7% for the NASDAQ 100 and the NYSE Composite, to 2.5% for the Russell 2000 and the Value Line Index (geometric). This setback left the tracking group down an average 0.1% for the year, although the median year-to-date result was a positive 0.3%. Returns for 2005 through last Friday ran in a range of +3.7% for the NYSE Composite, to a negative 3.4% for the DJIA.
* With regard to 2005 to date, up is up, of course. However, I think you must also consider these meager results within the context of the sky-high expectations on the part of most analysts/strategists as the year was beginning. Within this context, these meager results are, well -- meager!
----------------------------------------------------
SELECTED STOCK-MARKET MEASURES
(GRA Seven-Measure "Tracking
Group," Listed by YTD Returns)
----------------------------------------------------
09/23 3/2005 12/31 Week From
2005 High 2004 Ended March
Close Close* Close 09/23 High YTD
===== ====== ===== ===== ===== =====
NYSE Comp. 7519 7441 7250 -1.7% 1.0% 3.7%
Wilsh. 5000 12127 12074 11971 -1.9% 0.4% 1.3%
Russ. 2000 655 645 652 -2.5% 1.6% 0.6%
S&P 500 1215 1225 1212 -1.8% -0.8% 0.3%
Value Line 403 403 404 -2.5% 0.0% -0.3%
NASDAQ 100 1572 1545 1621 -1.7% 1.7% -3.1%
DJIA 10420 10941 10783 -2.1% -4.8% -3.4%
----------------------------------------------------
Average -2.0% -0.1% -0.1%
Median -1.9% 0.4% 0.3%
----------------------------------------------------
*2005 closing highs as of March, as of dates shown:
NYSE Composite (3/4), Wilshire 5000 (3/7), S&P 500
(3/7), Value Line (3/7), Russell 2000 (3/4), DJIA
(3/4), NASDAQ 100 (3/7).
----------------------------------------------------
* I have left the March 2005 highs in the above calculations, because I believe that in some important technical respects, those highs retain significance.
* While I am at it, following are the price-only returns for the DJIA, S&P 500 and NASDAQ 100 for the bear market to date (2000 closing highs through last Friday): DJIA = minus 11.1%, S&P 500 = 20.4%, NASDAQ 100 = 66.6%.
* And, yes, while I am at it, I will reaffirm my belief that we remain in a secular bear market that could have -- probably does have -- years yet to run.
* While Rita gets most of the blame for last week's poor equity-market behavior, stocks reacted badly on Tuesday to the news the Federal Open Market Committee had decided to again raise its federal funds target rate, from 3.50% to 3.75%. This action marked the 11th increase of 25 basis point in 11 policy meetings dating back to June 2004, taking the Federal Funds Rate from 1% to the current 3.75% level.
* The FOMC's decision is something I had expected as a virtual fait accompli. Apparently, though, this was not the case for the stock market. After doing little during most of Tuesday's trading session, stocks fell sharply after the Fed's interest-rate announcement. For the day, the respective DJIA, S&P 500 and NASDAQ 100 declines were 0.7%, 0.8% and 0.5%.
* And the FOMC post-meeting sell-off carried through Wednesday's trading session, too, although early concerns about Hurricane Rita might have begun filtering into the market by then. Last Wednesday, the DJIA, S&P 500 and NASDAQ 100 fell an additional 1.0%, 0.9% and 1.0%, respectively. Thus, most of last week's total declines were concentrated in Tuesday and Wednesday.
* Perhaps troubling the stock market was language in the FOMC's post-meeting statement suggesting the possibility if not probability of more rate increases to come. The possibility of another increase this year was reflected in the fed funds futures market as well, with the December contract finishing last Friday at 4.04%. (Two FOMC meetings remain scheduled during 2005, set for 11/1 and 12/13.)
* I listened to Bob Brinker over the weekend, who was very taken with the idea of a major overrection to Rita, at least to the negative impact the storm would have on the nation's energy sector. Brinker had as his guest Charlie Maxwell, the venerable oil analyst associated with Weeden & Company. I have great respect for Charlie's work, which I have followed from his early days at C.J. Lawrence.
* Nevertheless, in his frenetic efforts to discredit what he is fond of calling the "bad-news bears," I think Brinker may be missing an awfully important consideration. To wit: How much economic damage already is in the pipeline from the lagged effect of high energy prices, not to mention what lies ahead from what will be hugely elevated heating costs this winter?
* And another point Brinker should discuss more fully (and soon) is the negative fiscal fallout that surely is ahead from hurricanes Katrina and Rita. (Although the tab for Rita will be much, much smaller, can/will the federal government do for New Orleans what it is not going to or willing to do for elsewhere, especially with the 2006 midterm election now not all that far off?)
* As a prime example of a past misjudgment on energy prices, following is an excerpt of the minutes of the June 2004 meeting of the Federal Open Market Committee:
"...With regard to the prospective course of inflation, members suggested that some of the rise in core inflation in recent months appeared to have resulted from what might well prove to be transitory factors, notably including increases in energy and other import prices, which were not seen as likely to persist and indeed might be partially reversed. ..."
Two salient points about the above:
(1) A working definition of "transitory" is "enduring a very short time." The June 2004 FOMC meeting is now almost 15 months in the past.
(2) The average spot price of West Texas intermediate crude oil during June of 2004 was under $40 per barrel. On 7/1/05, almost exactly one year after the June 2004 FOMC meeting, the spot price stood at $58.70, a few dollars lower than a current price that is down from an even higher peak price.
* Perhaps sensing some of the inflationary problems that might well be ahead, physical gold hit a 17-year high last week, with the spot price finishing on Friday at just under $464 per ounce. I have been very bullish on gold; I still am.
* The Rita "relief rally" comes at a critical time for the stock market, since a lot of technical damage occurred over the last two trading weeks, but last week in particular. For example, there were three days last week in which NYSE 52-week lows exceeded highs. For the entire week, there were only a net of 190 new highs. And the sum of closing ticks on the NYSE last week came in at minus 181. Both of these stats marked very major departures from the on-balance norm of past months.
* So the question on the table isn't so much whether stocks are going to rally over the short run. Rather, what needs to be answered in the period immediately ahead is how far will the rally go and how long will it last?
* The bullish camp and its surrogates in most of the "financial media" (AKA here as "the regular propaganda loop") remain resolute in their determination to whistle past the graveyard and keep the good times rolling. Nevertheless, events of the next several weeks, even in the absence of anymore hurricanes, could make that task increasingly problematic.
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Some Stats
Table 1.
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SELECTED NYSE BREADTH MEASURES --
WEEKLY & CUMULATIVE DATA (10/29/04=0)
----------------------------------------------------------
Adv - Dec UVol - DVol 52W H - L Closing Tick
Week ----------- ----------- ----------- ------------
Ended Week Cum Week Cum Week Cum Week Cum
----------------------------------------------------------
2005
09/23 -3738 30577 -2.28 7.04 190 31545 -36 21545
09/16 -1842 34315 -0.27 9.32 465 31355 490 21581
09/09* 2269 36157 1.59 9.59 787 30890 721 21091
09/02 2633 33888 1.29 8.00 627 30103 574 20370
08/26 -603 31255 -0.85 6.71 227 29476 193 19796
08/19 -1419 31858 -1.15 7.56 207 29249 390 19603
08/12 632 33277 0.63 8.71 568 29042 524 19213
08/05 -1673 32645 -0.75 8.08 1189 28474 645 18689
07/29 1251 34318 0.31 8.83 1279 27285 432 18044
07/22 1777 33067 0.24 8.52 1003 26006 726 17612
07/15 1340 31290 1.22 8.28 1419 25003 518 16886
07/08* 2540 29950 0.93 7.06 1118 23584 713 16368
07/01 2539 27410 0.35 6.13 659 22466 536 15655
06/24 -2259 24871 -1.12 5.78 632 21807 295 15119
06/17 4086 27130 2.38 6.90 1059 21175 732 14824
06/10 1196 23044 0.52 4.52 633 20116 371 14092
06/03* 1900 21848 0.28 4.00 627 19483 398 13721
05/27 2267 19948 1.06 3.72 333 18856 296 13323
05/20 4613 17681 2.79 2.66 201 18523 601 13027
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*Four-day trading week.
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Table 2.
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THE BEHAVIOR OF CBOE SENTIMENT-RELATED MEASURES
AND THE S&P 500 FROM 04/20/05 THROUGH 09/23/05
-----------------------------------------------------
CBOE Options S&P 500
Date --------------- -------------------
or Put/Call Ratios Vs. 10/29/04
Week CBOE -------------------- Prior 1130.2 =
Ended VIX* All Equ. Ind. Tot.@ Close Week 100.00
-----------------------------------------------------
2005
09/23 12.96 0.95 0.63 1.87 0.89 1215.3 -1.8% 107.53
09/16 11.22 0.80 0.52 1.30 0.91 1237.9 -0.3% 109.53
09/09 11.98 0.78 0.51 1.60 0.90 1241.5 1.9% 109.85
09/02 13.57 1.15 0.61 3.01 0.90 1218.0 1.1% 107.77
08/26 13.72 1.20 0.81 1.99 0.90 1205.1 -1.2% 106.63
08/19 13.42 1.05 0.58 1.70 0.90 1219.7 -0.9% 107.92
08/12 12.74 1.28 0.63 2.80 0.90 1230.4 0.3% 108.87
08/05 12.48 1.15 0.55 2.77 0.90 1226.4 -0.6% 108.51
-----------------------------------------------------
08/03H 11.83 0.88 0.56 2.10 0.91 1245.0 -- 110.16
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07/29 11.57 0.99 0.66 1.65 0.91 1234.2 0.0% 109.20
07/22 10.52 0.80 0.56 1.97 0.91 1233.7 0.5% 109.16
07/15 10.33 0.75 0.54 1.19 0.89 1227.9 1.3% 108.64
07/08 11.45 0.82 0.42 1.58 0.88 1211.9 1.5% 107.23
07/01 11.40 1.00 0.55 2.10 0.88 1194.4 -0.2% 105.68
06/24 12.18 0.89 0.57 1.59 0.89 1191.6 -2.1% 105.43
06/17 11.48 1.02 0.53 1.93 0.91 1217.0 1.6% 107.68
06/10 11.96 0.71 0.47 1.55 0.90 1198.1 0.2% 106.01
06/03 12.15 0.99 0.61 1.90 0.90 1196.0 -0.2% 105.82
05/27 12.15 0.81 0.57 1.61 0.90 1198.8 0.8% 106.07
05/20 13.14 0.93 0.46 2.23 0.89 1189.3 3.1% 105.23
05/13 16.32 1.02 0.72 1.58 0.88 1154.1 -1.5% 102.12
05/06 14.05 1.07 0.80 1.67 0.88 1171.4 1.3% 103.65
04/29 15.31 1.01 0.74 1.65 0.88 1156.9 0.4% 102.36
04/22 15.38 0.98 0.67 1.90 0.88 1152.1 0.8% 101.94
-----------------------------------------------------
04/20L 16.92 0.98 0.63 1.87 0.88 1137.5 -- 100.65
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VIX Highs and Lows (Including Intraday)
---------------------------------------
Year High Date Low Date
---------------------------------------
2005 18.59 04/18 9.88 07/20
2004* 22.67 03/22 11.14 12/23
2003 41.16 03/12 14.83 12/15
2002 56.74 07/24 18.87 03/28
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*New series, all of 2004 forward. @All
products. L-Lowest S&P close during 2005.
H-Highest S&P close since 2000 high.
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Table 3.
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DJIA, NASDAQ COMPOSITE AND S&P 500 CLOSING PRICES ON
SELECTED DATES VERSUS RESPECTIVE 20-DAY, 50-DAY AND
200-DAY MOVING AVERAGES (Percent or Portion Thereof)
----------------------------------------------------------
DJIA Vs. NAZ Comp. Vs. S&P 500 Vs.
--------------- --------------- ---------------
Date 20D 50D 200D 20D 50D 200D 20D 50D 200D
----------------------------------------------------------
2005
09/23 -1.0 -1.4 -1.1 -1.4 -1.9 2.0 -0.8 -1.0 1.3
09/16 1.0 0.6 0.9 0.5 -0.0 3.9 1.1 0.9 3.3
09/09 1.5 1.2 1.3 1.4 1.0 4.9 1.6 1.3 3.6
09/02 -0.7 -0.8 -0.9 -0.2 -0.1 3.2 -0.2 -0.2 1.8
08/26 -1.6 -1.3 -1.4 -1.9 -0.8 2.3 -1.7 -1.2 0.8
08/19 -0.5 0.2 0.2 -1.7 0.2 3.1 -0.9 0.1 2.1
08/12 -0.3 0.6 0.6 -1.1 1.5 4.2 -0.2 1.1 3.1
08/05 -0.6 0.3 0.3 0.1 2.9 5.4 -0.4 1.0 2.9
07/29 0.8 1.2 1.3 1.6 3.9 6.1 0.8 2.0 3.9
07/22 1.6 1.5 1.5 3.0 4.5 6.2 1.7 2.5 4.1
07/15 1.8 1.8 1.7 3.1 4.5 5.4 1.7 2.6 3.9
==========================================================
2004
12/31 0.9 2.9 5.1 1.1 4.0 10.4 0.9 3.0 7.3
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Table 4.
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DJIA, S&P 500 AND NASDAQ 100 -- TW0-
WEEK COMPOUND ANNUAL RATES OF CHANGE
-- 19 WEEKS ENDED 09/23/05
--------------------------------------
Week S&P NASDAQ
Ended DJIA 500 100
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2005
09/23 -47% -43% -45%
09/16 62% 52% 54%
09/09 100% 117% 124%
09/02 -24% -4% -1%
08/26 -40% -42% -42%
08/19 +0% -13% -37%
08/12 -9% -8% -20%
08/05 -20% -3% 48%
07/29 +0% 14% 57%
07/22 65% 59% 206%
07/15 131% 105% 339%
07/08 46% 55% 76%
07/01 -55% -38% -56%
06/24 -42% -13% -30%
06/17 49% 57% -10%
06/10 -7% -1% -39%
06/03 -3% 16% 32%
05/27 175% 169% 291%
05/20 37% 48% 251%
--------------------------------------
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