Energy Sector Declines

At the end of May, 94% of Energy stocks were above their 50-day moving averages.  Currently, there are none.  At zero percent, the indicator can't get any worse.



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XOM vs S&P 500

With oil up 35% year to date, one would think that the biggest energy company in the world, XOM, would be up on the year as well.  As shown below, however, Exxon is now even underperforming the S&P 500 in 2008, down 15.32%.


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Sector Relative Strength

Below we have updated our charts of sector relative strength. In each chart, rising lines indicate periods where the sector is outperforming the S&P 500.  Charts with red shading indicate that the sector has underperformed over the last year. In each chart we also include red dots that highlight each of the Fed rate cuts since August.  We also included a chart of the relative strength of the Transportation sector versus the S&P 500.  While it has not been considered an 'official' sector since 2001, interest in the group has been high given its performance in the face of higher oil prices.

Over the last year, four sectors (Consumer Discretionary, Financials, Industrials, and Telecom Services)have underperformed the S&P 500, while six have outperformed.  More recently, however, we have seen some key reversals in the market's leading sectors.  For example, Energy and Materials have broken their uptrends that had been in place for much of 2007.  Additionally, the relative strength for Utilities peaked last week and has since had a quick reversal below support.

On the positive side, while Health Care stocks have been weak given the political climate, over the last month, the sector has outperformed by a wide margin.  While a short-term reversal could be in the cards, we would expect the sector to continue to hold up relatively well even under a democratic administration.  In our studies on sector performance since 1960, we found that when democrats control the White House and both houses of Congress, the Health Care sector has outperformed the S&P 500. 

Finally, while the Financial sector has had a strong rally over the last couple of days, the gains are hardly enough to qualify as a reversal considering their losses over the last month.





"Out of Bear Market Territory" -- No

Just a quick message to CNBC.  A couple of their anchors have mentioned that the S&P 500 has now moved "out of bear market territory" multiple times today.  While it would be nice, the market still has a long way to go for that to happen. 

To get out of the current bear market, the S&P 500 has to rally 20% from its low.  If July 15th was the low, the index needs to get all the way up to 1,457.89 to get "out of bear market territory" and be in a new bull market.  Just because the S&P 500 isn't down more than 20% from its highs anymore doesn't mean the bear market isn't still intact.  You wouldn't say "we're out of bull market territory" if the market rallied the required 20% only to pull back slightly to not be up 20% from the prior low anymore.



Comparing Oil and Natural Gas

ls oil destined for the path of natural gas?  Since breaking its tight uptrend last week, natural gas has continued its slide and has still not found support.  As shown in the bottom chart below, oil has now broken below the bottom of its uptrend, but it has yet to close solidly below it.  If that happens, it should see further declines in the short term.





S&P 500 Earnings Beat Rate At 72%

With 11% of S&P 500 companies reporting Q2 EPS, this quarter's EPS beat rate now stands at 72%.  While it's still early in the quarter, if this rate holds it would mark the second strongest quarterly beat rate since at least 1998.  What makes this rate even more impressive is the fact that so far this quarter, 34% of the companies reporting have been from the Financials sector, which many have feared would report disastrous quarters.  In last week's Week In Review, we mentioned that a better than expected earnings season could be the distraction needed to get investors' minds off of crumbling financials, higher oil and the weak economy.  So far so good.

In the chart below, we show the S&P 500 quarterly EPS beat rate since 1998.  For readers interested in following this statistic as earnings season continues, we will be updating it on a regular basis on our B.I.G. News site.


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All Financials

lf you don't have significant exposure to the Financial sector, chances are you're underperforming the market by a lot today.  With the S&P 500 up about 0.75% at the time of this posting, the S&P 500 Financial sector is up 5.43%, while four sectors are down more than 50 bps.  Utilities and Consumer Staples are each down more than 1%.  Talk about sector divergence.




Pakistani Investors Attack Stock Exchange

KarachibrokerWhile we rely on government action to stop stocks from going down, investors in Pakistan take to the streets and attack the stock exchange.  As shown in the chart below, the Karachi All Share Index has now gone down 15 days in a row, with the biggest declines coming this week.  Since June 27th, the index is down 17.07%.  As shown in the image at right, Pakistani investors are taking their losses out on the Exchange itself.

Below is an excerpt from a Bloomberg article written today by Farhan Sharif:

Pakistan investors stormed out of the Karachi Stock Exchange, smashed windows and cursed regulators after the benchmark index fell for a 15th day, the worst losing streak in at least 18 years.

``I have lost my life savings in the last 15 days and no one in the government or regulators came to help us,'' said Imran Inayat, 45, a protester and a former banker who retired early and said he lost 300,000 rupees ($4,175) on the market.

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What A Difference A Week Makes

Early last week, the S&P 500 and most sectors were sharply oversold.  The only sectors that were showing even hints of strength were Energy and Utilities, and they were the only two sectors that weren't oversold based on the standard deviations that they were trading below their 50-day moving averages.  Following yesterday's 2.5% rally, however, while most sectors are still oversold, the two sectors that are more oversold than any others are Energy and Utilities.  What a difference a week makes.

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2% Up Days in Bear Markets

After today's rally of 2.5% for the S&P 500, we decided to find how often 2% up days occur during bear markets.  Unsurpisingly, they aren't very common, but they do happen. 

As shown in the table below, 2% days occur on average 3.25% of the time during bear markets.  During the current bear, it has already happened 9 times (or 4.64%).  Looking at the list, they have been much more common since the '87 bear than they were prior to the crash.

We also provide the average percent change for the S&P 500 on the day following 2% days during each bear market.  While the overall average for the next day is +0.26%, the market has averaged declines in the last three bear markets. 




China's P/E Down to 20

After peaking just below 50 in January, the P/E ratio (trailing 12-month) of China's Shanghai Composite index is now at 20.95.  Since China has long been considered an emerging market with high growth potential, it has historically had a high P/E ratio (average 36).  However, a P/E of 20 is not unfamiliar territory for the index.  Back in mid '05, the P/E got all the way down to 16.39 just before the historic rise in the index over the next few years.


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Investors Intelligence Highest Bearish Reading Since 1995

Two sentiment reading released today show that investment professionals are currently at their most negative levels in at least a decade.  First, this week's reading of newsletter writer sentiment from Investors Intelligence showed that bearish sentiment rose to its highest levels in thirteen years.  The 49.8% of newsletter writers saying they are bearish is the highest reading since the level was at 50.9% in January 1995.


This morning, Merrill lynch also released its monthly fund manager survey, and according to that report, pessimism on global equities is currently at an all-time high. 

Given the weak economy and crumbling financial sector, these negative views are understandable, but it's a little bit ironic that while investors are the most bearish they have been on equities in several years, companies so far this quarter are beating EPS expectations at a rate not seen in several years.  As shown in the chart below, while only 6% of S&P 500 companies have reported EPS, 76% of them have beaten forecasts.  If this pace were to continue it would be the highest beat rate since at least 1998.



More From Bespoke

Our B.I.G. Tips reports continue to make up the centerpiece of our wide product line at Bespoke Premium.  As our firm has grown, these reports have become must-reads for major market participants looking to stay on top of the trade in this tough environment.  Below we provide just a few samples of recent B.I.G. Tips reports for readers that may want to learn more about our analysis.  Sign up now to receive our entire product line for just $1 per day.


Guess the Equity

The security below is up a whopping 181% since its debut in early 2007.  And its parabolic rally since the start of May has owners basking in profits.  What is it?


Click here to find out.


International Equity Market Snapshot

Below we highlight our trading range charts of 22 country equity market indices.  As you'll quickly see, the level of oversoldness is out of control.  Generally, if you draw a downward sloping trend channel for the majority of these indices, prices are now resting right at the bottom of the channel.  This indicates that a rally within the downtrend could come soon.