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Foreword
"Markets Thoughts" is an examination of recent financial-market developments to help assess what might be ahead.
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Summary
Late this year has seen a stock-market rally that so far, in its overall timing, is not dissimilar to what the market experienced late last year. And so far, the justification for this year's rendition appears similar, too -- something predicated more on need than on substance. This edition of "Last Week" will take a look at where matters stand.
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* STOCKS: After a very sloppy first two to three weeks of October, stocks have registered impressive gains over the last four to five weeks. From their October lows through 11/18, the DJIA, S&P 500 and NASDAQ 100 are up 5.4%, 6.0% and 10.5%, respectively.
* Last year, a host of hedge funds required significant year-end markups to recover from a 2004 that had been very, shall we say, "performance deficient." Justified or not, what quickly was dubbed the "Bush relief rally," which commenced about concurrent with the Presidential election outcome, provided just what those in the performance hole needed. This year, in mid-October, many in the hedge-fund community found themselves suffering last year's malady. Therefore, what has transpired in recent weeks has been a welcomed development.
* The major players in Wall Street's broker-dealer community derive a disproportionately large amount of their business from hedge funds. Thus, these folks stood (last year) and stand (this year) ready to "help" their hedge-fund friends by doing anything they can to keep the better times rolling. And, so far, so good!
* The recent rally, now pushing five weeks in duration, has pushed all but one of the GRA tracking group's seven components into the black for the year, with the DJIA being the exception. The group's average year-to-date gain stood at 2.9% as of last Friday, with component gains running in a range of 5.3% for the NYSE Composite, to minus 0.2% for the DJIA.
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SELECTED STOCK-MARKET MEASURES
(GRA Seven-Measure "Tracking
Group," Listed by YTD Returns)
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11/18 9/2005 12/31 Week From
2005 High 2004 Ended Sept.
Close Close* Close 11/18 High YTD
===== ====== ===== ===== ===== =====
NYSE Comp. 7635 7664 7250 +1.0% -0.4% +5.3%
Wilsh. 5000 12495 12418 11971 +1.1% +0.6% +4.4%
NASDAQ 100 1680 1612 1621 +1.6% +4.2% +3.6%
Russ. 2000 672 681 652 +0.8% -1.3% +3.1%
S&P 500 1248 1241 1212 +1.1% +0.6% +3.0%
Value Line 408 418 404 +0.9% -2.4% +1.0%
DJIA 10766 10683 10783 +0.8% +0.8% -0.2%
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Average +1.0% +0.3% +2.9%
Median +1.0% +0.6% +3.1%
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* There have been a couple important technical junctures for monitoring purposes this year -- the March highs, and more recently, the September highs. As the above table indicates, four components now stand above their September highs, with last week's overall strength being very helpful in the process.
* The September highs were definitely not of a genuine "breakout" variety. In fact, the subsequent pullback from those levels kept intact the longer-term "broadening top" pattern in evidence in the charts of several of the bellwether market indexes. Moreover, with the tracking group ending last week with only a 0.3% average premium to the September highs, around current levels would not be a good place from which to launch a meaningful pullback.
* Nevertheless, some important negative technical divergences have been present during the rally, particularly during the last two weeks of it. The following table exposes some of them.
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SELECTED NYSE BREADTH MEASURES --
WEEKLY & CUMULATIVE DATA (10/29/04=0)
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UVol-DVol Average Net
Adv-Dec (Bils.) 52W H-L Closing Tick
----------- ---------- ---------- -----------------
Week Vs.
Ended Week Cum Week Cum Week Cum Week Cum Prior
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2005
11/18 146 28646 1.06 9.44 -259 29755 535 25086 1.022
11/11 999 28500 1.03 8.38 26 30014 579 24551 1.024
11/04 2974 27501 3.51 7.37 244 29988 703 23972 1.032
10/28 -150 24527 0.35 3.86 -440 29744 378 23269 1.017
10/21 -801 24677 -0.49 3.51 -588 30184 472 22891 1.021
10/14 -3911 25478 -1.80 4.00 -1066 30772 61 22419 1.003
10/07 -3174 29389 -2.64 5.80 -24 31838 133 22358 1.006
09/30 1986 32563 1.40 8.44 317 31862 446 22225 1.020
09/23 -3738 30577 -2.28 7.04 190 31545 -36 21779 0.998
09/16 -1842 34315 -0.27 9.32 465 31355 490 21815 1.023
09/09* 2269 36157 1.59 9.59 787 30890 721 21325 1.035
09/02 2633 33888 1.29 8.00 627 30103 574 20604 1.029
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*Four-day trading week.
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* Despite a broad measure like the S&P 500 showing a 2.3% gain over the last two weeks, there were only a net of 1,145 NYSE issues advancing during the period. NYSE net advancing volume totaled only 2.09 billion shares, and 52-week lows actually exceeded highs by a net of 233 over the period. This suggests an overall market advance that was quite narrow in its leadership.
* Note in the above table that as of last Friday, the advance-decline, up-down volume and high-low series all had cumulative values below where they stood for the week ended September 9th, which was about concurrent with the September highs.
* Another measure showing the same phenomenon is one of my proprietary technical measures. It has now generated four consecutive weekly "divergences." (This series measures the symmetry between NYSE advancing-declining issues and NYSE advancing-declining volume.) Historically, these divergences frequently are the harbinger of sharp pullbacks occurring not long after the divergence appears.
* Another series showing that momentum has not built to the degree you might expect, and may now be rolling over, is one measuring short-term rates of change. For this purpose, I employ two-week rates.
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DJIA, S&P 500 AND NASDAQ 100 -- TW0-
WEEK COMPOUND ANNUAL RATES OF CHANGE
-- 12 WEEKS ENDED 11/18/05
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Week S&P NASDAQ
Ended DJIA 500 100
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2005
11/18 78% 81% 126%
11/11 101% 117% 376%
11/04 121% 141% 179%
10/28 34% 29% 24%
10/21 -18% -30% +17%
10/14 -50% -60% -61%
10/07 -27% -34% -23%
09/30 -16% -17% 4%
09/23 -47% -43% -45%
09/16 62% 52% 54%
09/09 100% 117% 124%
09/02 -24% -4% -1%
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* The "machinations" (euphemism for something even more sinister) associated with most expirations were likely helpful in last week's expiration in sustaining the rally. But the major options-related measures came out of the week sporting numbers consistent with a very overbought market.
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THE BEHAVIOR OF CBOE SENTIMENT-RELATED MEASURES
AND THE S&P 500 FROM 10/29/04 THROUGH 11/18/05
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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
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2005
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11/18H 11.12 0.62 0.46 0.86 0.88 1248.3 1.1% 110.45
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11/11 11.63 0.68 0.49 1.13 0.87 1234.7 1.2% 109.25
11/04 13.17 0.88 0.51 2.05 0.88 1220.1 1.8% 107.95
10/28 14.25 0.84 0.68 1.20 0.88 1198.4 1.6% 106.03
10/21 16.13 1.02 0.66 1.65 0.86 1179.6 -0.6% 104.37
10/14 14.87 1.06 0.70 1.65 0.86 1186.6 -0.8% 104.99
10/07 14.49 0.95 0.61 1.68 0.88 1195.9 -2.7% 105.81
09/30 11.92 0.83 0.53 1.73 0.89 1228.8 1.1% 108.72
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
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04/20L 16.92 0.98 0.63 1.87 0.88 1137.5 -- 100.65
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04/15 17.74 1.42 1.00 2.17 0.86 1142.6 -3.3% 101.10
04/08 12.62 0.93 0.55 1.82 0.86 1181.2 +0.7% 104.51
04/01 14.09 1.06 0.81 1.61 0.86 1172.9 +0.1% 103.78
03/25 13.42 0.78 0.50 2.04 0.88 1171.4 -1.5% 103.65
03/18 13.14 1.27 0.72 2.95 0.88 1189.7 -0.9% 105.26
03/11 12.80 0.99 0.62 1.97 0.88 1200.1 -1.8% 106.18
03/04 11.94 0.81 0.61 1.31 0.86 1222.1 0.9% 108.13
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VIX Highs and Lows (Including Intraday)
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Year High Date Low Date
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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 during entire period.
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* INTEREST RATES: Stock bulls have attempted more than once this year to further their cause by suggesting the Fed would soon take a pass on more hikes in the Federal Funds Rate. Whether this gets rolled out of the bullish arsenal again for the next meeting of the Federal Open Market Committee remains to be seen. (The FOMC's next scheduled on 12/13.) However, based on where federal funds futures were trading last Friday, the FOMC will increase the funds rate by another quarter point in December. Moreover, last week's futures run indicated a strong likelihood of yet another 25 basis-point hike at the FOMC's January meeting (scheduled for 1/31).
* THE DOLLAR: With last Friday's close of just under 92, the Dollar Index now stands at the top of the 90-92 range I have been talking about in recent months as the general area I thought would likely contain the greenback's upside, using this index as a proxy. Thus, the moment of truth has arrived, and we should find out reasonably soon whether this area has some meaning.
* CRUDE OIL: My last pronouncement on crude oil (made on 11/8) suggested support in the $55 to $60 range. So far, so good, and I'll stick with those numbers.
* PHYSICAL GOLD: In the "Last Week" edition dated 11/8, I stated the following:
"Some people are opining that gold has made (past tense) an important top. I don't agree...and believe there is likely to be another good move to the upside before year-end. ..."
* At the time, spot gold was around $460, versus last Friday's $485. Again, so far, so good.
* Many months ago, I spoke of a decent chance of seeing bullion reach $500 by the end of this year, which would produce a 2005 gain of roughly 14%. The chance remains alive! On the other hand, if last Friday's close were it for the year, a 10.7% rise isn't shabby.
* The XAU has done measurably better than physical gold, as you would expect. As of last Friday, it was up almost 16% for the year, and last week's high was the highest level at which the XAU has traded since March of 1997.
* POLITICS: Several weeks ago, I offered the view that the domestic and international political climates, which were not great anyway, were likely to take a more hostile turn. I believe they have!
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