Archive for October, 2015

• Morning News: October 7, 2015
  Eddy Elfenbein, October 7th, 2015 at 7:17 am

  Bank of Japan Keeps Policy Steady, More Easing Still Seen At End Of Month

  China Forex Reserves Post Record Quarterly Fall as Cenbank Steps Up Yuan Support

  German Industrial Output Unexpectedly Falls as Risks Emerge

  In a Reunion, Bernanke and Geithner Revisit the Crisis

  Agency Targets The Fine Print Preventing Customers From Joining Class Actions

  Big U.S. Firms Hold $2.1 Trillion Overseas to Avoid Taxes

  AB InBev Makes $100 Billion SABMiller Offer Public After Snubs

  Samsung Surges Most Since 2009 as Profit Beats Estimates

  Ouch! American Apparel’s Bumpy Ride May End With A Bankruptcy But There’s Lessons For Entrepreneurs

  Peet’s Buys Stumptown Coffee Roasters

  Yum Brands Cuts Profit Outlook on China Woes

  DuPont’s Interim Boss Edward Breen Is a Breakup Expert

  French Government Backs Air France Over Savings Showdown

  Joshua Brown: What Oil Does to Profit Margins

  Roger Nusbaum: A Difficult Third Quarter Comes To An End

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• 50-DMA Is Close By
  Eddy Elfenbein, October 6th, 2015 at 6:51 pm

  The pieces are slowly coming together. First, the VIX closed below 20. It did so again today. Now the S&P 500 is getting close to its 50-day moving average. The 50-DMA is currently 1,998.52.

  It’s a generality but the stock market does better when it crosses above its moving averages. The 200-DMA, which is still over 2,062, is a stronger signal.

  

• Beware What’s Hiding in a Sector ETF?
  Eddy Elfenbein, October 6th, 2015 at 1:18 pm

  Recently, I mentioned that the Healthcare sector contains biotech stocks which behave quite differently from the rest of the sector. The market seems to treat Biotech as more tech than bio. That makes sense to me.

  An investor buying the Healthcare ETF (XLV) may not realize how much exposure to tech they’re taking on. I’ve noticed how Healthcare has departed from Consumer Staples in terms of performance (they’re usually quite close), and I suspect that’s in large part due to the enormous rise in Biotech. Perhaps there should be an ETF which is XLV ex biotech.

  I noticed ads for a new ETF which is the SPY without Energy. That certainly would have been a good strategy the last several months. Of course, the appearance of that ETF probably signals that the trend is not long for this world.

  Here’s a look at the relative strength of the Healthcare ETF (XLV) in black along with the relative strength of the Biotech ETF (IBB) in red. I was shocked by this. While the two lines have similar nooks and crannies, the behavior is very different. It’s as if the IBB is like a highly leveraged XLV.

  

• Morning News: October 6, 2015
  Eddy Elfenbein, October 6th, 2015 at 7:04 am

  EU Court Says Data-Transfer Pact With U.S. Violates Privacy

  German Factory Orders Unexpectedly Fall Amid Economic Risks

  Central Banks Lose Bond-Market Credibility as Woes Mount

  2,000% Drug Price Surge Is a Side Effect of FDA Safety Program

  VW to Delay, Cancel Non-Essential Investments Due to Scandal

  SABMiller Said to Have Rejected Informal Offer From AB InBev

  PepsiCo Earnings Beat Forecasts

  Record ATM Fees Rise Toward $5

  Jack Dorsey’s Twitter Return Raises Concerns Over Focus on Square

  BP’s Record Oil Spill Settlement Rises to More Than $20 Billion

  Interim DuPont CEO Promises Cuts

  Fortune 500 Firms Hold $2.1 Trillion Overseas to Avoid Taxes

  Shell Sees Signs of Oil Recovery Though `Rebalance’ to Take Time

  Cullen Roche: What If Everyone Indexed?

  Jeff Carter: A Textbook Case on Organized Internet Lynching

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• VIX = 19.54; “All Clear!”
  Eddy Elfenbein, October 5th, 2015 at 5:39 pm

  This was an impressive day for Wall Street. Stocks opened higher and they kept rallying into the closing bell. The S&P 500 finished trading at 1,987.05, perhaps a nod to events 28 years ago this month. Since Friday’s low, the index is up 93 points.

  

  Perhaps the best news is that the VIX closed at 19.54, which triggered my “all clear” warning. That doesn’t mean the market is about to surge higher, but it probably signals that the elevated volatility is behind us.

  

  Today was a heavily cyclical day. For example, Wabtec (WAB) was up more than 4% today. Moog (MOG-A) also did well.

  Students of the Elfenbein Theory will recognize today as a classic Quadrant 1 day.

  

• Five Straight Days, Longest Win Streak All Year
  Eddy Elfenbein, October 5th, 2015 at 12:28 pm

  The stock market is looking very good so far today. But with our recent reversals, I don’t want to say anything is locked-in until the closing bell rings.

  This looks to be our fifth up day in a row which is the longest streak this year. The S&P 500 has been as high as 1,977 today which is more than 100 points above last Tuesday’s low. That’s a huge turnaround. All sectors but Healthcare are up today. The Cyclicals are leading the way. One of our favorite Consumer Staples, Hormel Foods (HRL), just touched a new 52-week high.

  One of the few things that’s down today is the VIX. It’s currently just below 20, and it has a good chance of closing there today. That’s been my trigger for our “all clear” signal. The VIX has been above 20 for the last 30 days which is the longest streak since early 2012.

  Wall Street is still adjusting to the bad jobs report on Friday. The futures market has almost completely walked away from the idea of the Fed raising rates this year. The futures now see one rate hike in March, and another one late next year. Just a few days ago, the six month Treasury was near 0.3%. Today, it’s below 0.05%. This has been a major change in the market’s outlook.

• Morning News: October 5, 2015
  Eddy Elfenbein, October 5th, 2015 at 7:10 am

  Stocks Rise As Investors See Fed Delaying Hike

  World Bank: Less Than 10% Of The World Will Be Poor This Year

  India Agrees to Fast-Track German Business Deals

  U.K. Services Downturn May Keep BOE Cautious on Interest Rates

  As Pacific Trade Negotiators Haggle, U.S. Officials Remain Hopeful

  It’s Turning Into a Brutal Game of Survivor for ETFs

  Bernanke: More Execs Should Have Gone to Jail After Financial Crisis

  Glencore Follows Hong Kong Rally With Jump in London Trading

  Activist Firm Trian Makes a Big Bet on GE

  Potash Corp. Withdraws $8.8 Billion Offer for German Rival K+S

  American Apparel Files for Bankruptcy Protection After Losses

  Legal Troubles, Market Realities Threaten Uber’s Global Push

  Saudi Aramco Cuts Crude to Asia, U.S. Amid Weak Demand

  Joshua Brown: The Speculative Urge is Connected to Sporadic Reinforcement

  Jeff Miller: What Is Behind the Recent Market Volatility?

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• S&P 500 Sector Correlation
  Eddy Elfenbein, October 3rd, 2015 at 10:03 am

  Here’s a bit of a wonky post, and I should give due warning to any math-phobes out there.

  The S&P 500 has ten sectors. I took the ten sector indexes for this year and divided each one by the S&P 500. I took the results and calculated the correlation each one has to all the others.

  To reiterate, I only used the data for this year, and this is the correlation of the relative strength of the indexes, not the indexes themselves.

  Here are the results:

  Sector	Energy	Discr.	Staples	Finan	Health	Indust.	Tech	Materials	Telecom	Utes
  Energy		-86.0%	-41.5%	-64.6%	-72.3%	81.5%	-40.2%	92.6%	58.8%	18.7%
  Discr.	-86.0%		12.9%	46.7%	70.4%	-84.2%	46.3%	-81.1%	-58.5%	-51.0%
  Staples	-41.5%	12.9%		10.4%	-6.1%	-11.3%	-13.7%	-55.2%	2.5%	69.4%
  Finan.	-64.6%	46.7%	10.4%		60.2%	-68.4%	0.7%	-58.0%	-57.0%	-24.9%
  Health	-72.3%	70.4%	-6.1%	60.2%		-83.5%	10.9%	-64.7%	-72.3%	-49.4%
  Indust.	81.5%	-84.2%	-11.3%	-68.4%	-83.5%		-34.9%	81.7%	68.2%	46.0%
  Tech	-40.2%	46.3%	-13.7%	0.7%	10.9%	-34.9%		-30.7%	-25.3%	-40.5%
  Materials	92.6%	-81.1%	-55.2%	-58.0%	-64.7%	81.7%	-30.7%		57.1%	2.8%
  Telecom	58.8%	-58.5%	2.5%	-57.0%	-72.3%	68.2%	-25.3%	57.1%		46.0%
  Utes	18.7%	-51.0%	69.4%	-24.9%	-49.4%	46.0%	-40.5%	2.8%	46.0%

  We see a number of clusters. Notice how the Industrials, Energy and Materials sectors hang together with Telecom nearby. That’s our Cyclical cluster.

  Also, Healthcare and Consumer Discretionary are clearly related with Finance as a not-too-distant cousin. These are Defensive stocks. Notice also how the Cyclical sectors and Defensive sectors are negatively correlated with one other. The market leans toward one or the other, but not both.

  Consumer Staples and Utility stocks form a third cluster. This is a little surprising. I would have expected Staples and Healthcare to be closer together, but that’s not been the case this year. I’d normally call these Income stocks, but that may not be the best name this year. Within this group, the Staples have a very slight relationship with Defensive stocks while the Utes have a distant correlation with the Cyclicals.

  The Tech sector is interesting because it’s an island to itself. Tech isn’t strongly correlated with any sector. Nor is it negatively correlated with anyone. It’s almost as if Tech is an entirely different asset class. Tech does have a passing relationship with Consumer Discretionary, but not with the other Defensive sectors.

  There’s some blurring and overlap with these categories so I urge you not to be overly mechanistic with this data. Correlations come and go. I also have some issues with the categories. For example, Visa is considered a tech stock. The Biotechs are under Healthcare but as their name suggests, they’re really both Healthcare and Tech. I’m sure some Biotechs are more correlated with Internet stocks than with J&J. The REITs are included with Finance. Next year, S&P 500 plans to spin REITs out as an eleventh category. That’s a good idea. They behave much more like Utilities than they do large banks. (Did you know Weyerhaeuser is technically a REIT?)

• Huge Reversal Today
  Eddy Elfenbein, October 2nd, 2015 at 4:14 pm

  The stock market opened much lower today, but it rallied strongly throughout the day.

  From bottom to top, the S&P 500 gained 57.66 points or 3%. The index closed today at 1,951.36. This was the market’s fourth up day in a row.

  

• 22 Straight Quarters of Higher Dividends
  Eddy Elfenbein, October 2nd, 2015 at 10:41 am

  Dividends continued to grow last quarter, at least on a per-share basis. In Q3, the S&P 500 paid out $10.79 per share in dividends. That’s the index-adjusted figure (every $1 in the S&P 500 is worth about $8.81 billion).

  Dividends increased last quarter for the 22nd quarter in a row. The rate of increase, however, slowed to 7.67%. That’s the second-slowest rate in the last 19 quarters. The only reason Q4 of 2013 was lower was due to unusually high comps caused by the new tax law. In Q4 2012, companies paid out lots of divs to take advantage of the lower rate.

  As I’ve noted before, this bull market has been one of dividends as much as it’s been one of stocks. What’s interesting is how closely the S&P 500 has tacked a 2% dividend yield over the last few years.

  Check out the chart below. This shows the S&P 500 in blue and it follows the left scale. The trailing four-quarter dividends are in black and they follow the right scale. I scaled the two lines at a ratio of 50-to-1. In other words, whenever the lines cross, the index’s dividend yield is exactly 2%.

  

  A few items stand out. For one, notice how much more stable the black line is than the hectic blue line. From 2004 to 2007, the S&P 500 maintained a dividend around 1.8%. Then everything fell apart during the financial crisis. But stock prices fell far more than dividends. Notice how the blue line tends to move, up or down, before the black lines. By Q2 2010, dividends started to rise again.

  Once the dividend trend got going, stock prices largely kept pace with dividends. That’s one of the reasons why I’ve been reluctant to say that this market is a bubble despite many voices insisting that it is.

  The S&P 500 will probably pay out $43 per share in dividends this year. That’s a 90% increase from what was paid out in 2010.

  Thanks to the market’s recent dip and higher dividends, the S&P 500 paid yielded 2.21% on a trailing four-quarter basis. That’s the highest in four years. To get a 2% dividend yield, the index would have to rally to 2,125. That’s about a 10% leap from where we are now.