Stock Market Volatility 1930's Style

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http://www.bigtrends.com/document.jsp?documentid=682

Cincinnati Business Courier Feature 3/27/09

Market Notes for Cincinnati Business Courier Interview

Notes on Recent Rally:

Prior to the rally last couple of weeks, sentiment was very bearish. Meaning, conditions for a short-term rally were forming.

For example(s), the following were signs of extreme bearish sentiment:

Citigroup Panic/Euphoria Index -0.53 – multi-month lows

Consensus 18% - lowest levels since 2001

AAII 18.9%

Market Vane – lowest levels since 2003

Even the headline “news” -

Jon Stewart taking Jim Cramer to task – is this really newsworthy in ordinary times?

Economic/Government bailout protest on Fountain Square – how often has this occurred in the past?

AIG bonus backlash – people touring the homes of AIG execs – startling!

Don’t mistake recent rally as a new bull market, as bear rallies markets common:

We have seen three 20%+ rallies (from low to high) in the S&P 500 Index

(1) 20% rally from low to high 666.79 to 803.24 in March

(2) 27% rally low to high November 2008 through early January 2009

(3) 24% rally October (2008) low to high

Past bear markets:

1929-1932 - seven rallies that averaged 24% over 40 calendar days

2000-2002 – six rallies averaging 15%, with 3 in 20% range

Looking Ahead to Next Few Weeks

April has been historically strong

-Since 1950 – 68% of April’s have been positive and returns falls 3^rd best (behind November/December)

-Since 2000 – best month with 1.46% average return

Intermediate Term (several months)

Valuations (price-earnings ratios) still “high” relative to past bear markets - 15.81 with a forward price-earnings ratio of 12.42. I would be encouraged with a p/e average 10 to 12 with the lower p/e’s coming from the denominator (earnings rebound). Additionally, S&P 500 yield is respectable at3.55%, but a move to 5% to 6% range this would make stocks extremely attractive investment relative to alternatives.

An interesting note by The Aden Forecast: “On average, banking crises tend to last about seven years, from beginning to end. Unemployment tends to remain a problem for about four years. Housing prices fall for around five years, averaging a 36% decline, while stock prices tend to drop 56% with the decline lasting about three years. Government debt also surges by nearly 90%.” As such, this market is likely to grind for several months as it transitions through this challenging period.

Recommendation

-Remain defensive

-High cash position

-Seek out dividend yielding stocks with a low payout ratio. Also, those stocks should have stable earnings expectations and a low p/e (for capital appreciation upside)

-Energy (SUN, SRE), Defense (RTN, LMT), Consumer Goods (CAG, CPB, PM)

-Guard against inflation - ETFs: GLD, TIP, LQD

Expectational Analysis on Sectors

Below is summary table of various factors in our EA approach on various sectors.

Here's how to read the table:


Any measure in green is considered bullish with the sector exceeding the S&P 500 Index benchmark (last line in table). For example, if the index outperformed the SPX on any 1-month to 1-year % return measure, it was considered bullish.


Any measure in red is considered bearish with the sector falling short of the S&P 500 Index benchmark (again last line in table).


The Fidelity Share Percentile is green when the Percentile is less than 60% and red if the percentile is higher than 90%

Noteworthy Observations:
(1) Retail has been strong technically (outperforming SPX 3-month to 1-year), has a fairly low buy percentage (37.84%), low Fidelity share percentile rank (43.20%), pessimism on the SOIR front and a Fundamental/Earnings Momentum factor that is better than the SPX average (2.7 vs.2.88)


(2) Healthcare has been underperforming the SPX over various percentage return measures. In spite of this weakness, over half the ratings are buys for the sector. Furthermore, Fidelity Percentile stands at 97%. Fundamentally, Zacks averages out to be 3.17.


(3) Utilities looks good with the exception of Fidelity share rank (92%)


(4) Automotive looks good with the exception of Zacks average (3.09)

S&P 500 Commitment of Traders

Large Speculator on the S&P 500 Index have shifted lower in their net positions (top graph).

The second graph shows that the liquidation of Net Positions have been a harbinger of a market downturn.

Finally, small trader has spiked in net positions.

SIR Equity P/C Ratio

The SIR Equity p/c ratio has come off its highs from the 0.73 range. As seen by the graphic below, these peaks marked perfect bottoms over the last three years.

The growing concern now is that the p/c ratio has stopped declining and may have put in a bottom on December 5 (second graph).

The final graph is a forward weighted moving average, which confirms the second graph that a bottom could be forming.

Our interpretation has been a declining SIR p/c ratio is bullish while a rising one is bearish. At this moment, it appears that we may be transitioning from a declining ratio to a rising ratio.

Given that the market (SPX) has stalled since late November, option players seem to be adjusting positions.