You’ll see a noticeable change in the length of the earnings calendars from this point on, indicating we’re now past the heart of earnings season. There are still some game-changers in the lineup though.
As for how the market fared so far (with 80% of companies reporting), about 67% of companies topped their EPS estimates, and 61% beat their revenue estimates. That’s pretty much the norm.
The most surprises came from the consumer discretionary and technology sectors. A full 82% of consumer discretionary stocks beat estimates, while more than 91% of technology companies topped last year’s earnings.
Technology stocks also saw the biggest revenue increases; 96% of these companies beat last year’s comparable revenue levels. The financials generated the most beats of revenue estimates, with 87% of its stocks doing more sales than expected.
Here’s what’s in store for this week.
After a multi-week slump, financial stocks finally took off and led last week’s gains. Given how badly they’d underperformed since mid-September, any marketwide bullish tide should continue to prove very fruitful for the group.
On the losing end of the spectrum were health care stocks, though they still ended the week with a small gain.
Here’s a look at how each sector has been accelerating or decelerating since the late-April top. The remaining upside for the financial sector is clear here. And, it’s also clear with this graphic that telecom remains stretched thin.
No major surprises here, considering the leading and lagging sectors. Banks blazed the trail for financials, and biotech pulled health care stocks lower.
That said, some of the best and worst from last week are newcomers… and made big reversals that may be the beginning of trade-worthy trends. Take the 13% pop from the construction materials group for instance, which is still one of the biggest losers from any prior timeframe. Conversely, broadcasting stocks finally got knocked off their bullish perch, yet still have plenty of room to slide lower.
There’s too much data from last week to look at all of it; we’ll just hit the highlights, starting with personal income and personal spending. The former was down 0.1% for September, while the latter was up 0.2%. Correspondingly, consumer credit levels were up by $2.1 billion…. the first increase in many, many months. Back to the norm of “spend more than you make.”
On the jobs front, the bigger trend showed marked improvement, even if the near-term trend slumped a bit over the last couple of weeks.
The ADP Employment Change of net +43K jobs coincided with the 151K increase in nonfarm payrolls for October….both well above expectations, and both the strongest showing in quite some time. Unemployment held steady at 9.6%.
More recently, the previous week’s initial unemployment claims popped to 457K (which is in the middle of the recent range of readings), while ongoing claims from two weeks ago drifted a hair lower to 4.34 million. Despite the modest panic, the new claims level isn’t all that remarkable.
The rest is cited on the table below.
As for the coming week, it should be much less hectic. Only a handful of numbers are in the cue, and none of them are earth-shattering. We won’t even bother with a preview; just look at the lower half of the above calendar.
Apparently the secret formula for bullishness is quantitative easing. Never mind the fact that the Fed’s decision to (further) lower interest rates doesn’t directly create jobs, nor does it prompt a bank to suddenly determine a potential borrower is more credit-worthy. The market just wanted to see evidence that the Fed was ahead of the curve, and Bernanke delivered. Boom - stocks gained 3.6% last week, most of it on Thursday.
But is there any longevity to the uptrend? Bluntly, you’d be hard-pressed to even call it a trend. It was more of a one-hit-wonder that just happened to drive the market further into an overbought situation. But hey, the market’s rallied right through worse.
What is there to say about the S&P 500 that would mean much in the way of an outlook? Last week was all about the Federal Reserve inducing a rally. Fundamentals didn’t matter. Earnings didn’t matter. Technical momentum - or lack thereof - didn’t matter. The market pretty much demanded Bernanke do something, and he obliged. The question from here is, how much mileage can stocks get out of what should largely be a pointless action (QE) from the Fed?
Unfortunately, the answer is “not much” if previous emotionally-driven rallies are any clue. At some point the market has to justify its value.
In any case, the gravy train may have already stopped, with the S&P 500 back at the upper Bollinger band (purple) that’s been such a problem going as far back as early 2009.
On the other hand, we need to at least acknowledge that the upper band line isn’t necessarily a bearish reversal point - it may only be the area where the incredible rally slows down…. like we saw in October.
Simultaneously, the VIX stopped its downward move at its lower Bollinger band, suggesting confidence in the rally at this point is low.
So a pullback is in the cards? We’re due a pullback, but we were due a pullback in late October and the S&P 500 continued to rally anyway. [As John Maynard Keynes said, "The market can stay irrational longer than you can stay solvent."] So, as for how to proceed from here…
The market is overextended now no matter what; look for a pullback to some degree early this week. How far? That depends.
Until the 20-day moving average line (blue) at 1185 - and rising - breaks down as support, there’s no valid reason to assume the implosion is nigh. Of course, after the 16% runup since September’s low, any implosion could be a hefty one when and if it gets rolling.
On the flipside, don’t rule out more upside. If a small retreat can cool the rally off enough to bleed off some of this overbought pressure (a dip to the 20-day line would do the trick), the bulls could regroup and restart the uptrend pretty nicely.
The last thing the bulls want to see happen here, however, is for the market to pop even just moderately above the upper Bollinger band. Such a move could be interpreted as a blowoff top…. a last hurrah, of sorts. Be leery of such a move,
In the meantime, the market’s in limbo. You may want to stay on the sidelines until we get a little more clarity.
After yet-another disappointing building permits and housing starts update on Tuesday of this week, we were inundated with yet-another salvo of news commentaries stating the obvious…. with headlines such as Home Builders Continue to Struggle…”, and “Housing Starts Still Weak”. Fair enough.
The most amusingly-obvious (yet also irritating) story came from U.S. News & World Report … “Home Builders Not Driving Economic Recovery”.
There’s little doubt that homebuilders aren’t driving the recovery. The question is, are they even participating in the recovery? So far it seems as if they’re not - at least not in a meaningful way. Unfortunately, none of the recent news has quantified where homebuilders are now, versus where they were then, versus where they should be. That, however, comes as no real surprise, as that kind of journalism requires actual research beyond the latest economic report.
Since no other media members seem willing to paint a ‘big picture’ of the homebuilder plight, we will.
First Things First
A final good/bad assessment of the industry is below, but a couple of explanations are in order to explain the “why” of our digging before we get into the “what”. Let’s all first understand that:
- We know the peak of the real estate bubble was in 2005, but we need to know the relative size of the bubble before we start drawing comparisons to it…. something the media has yet to describe.
- We need to define an earnings-based ‘norm’ for homebuilder stocks if we’re going to say they’re overvalued or undervalued now.
- We need to understand the correlation between earnings and capacity of demand; we can’t reclaim 2005’s earnings levels on 2008’s demand for new homes.
See where this is going? Great. Then let’s get on with it.
At first glance all seems like it’s getting back to normal for the homebuilders. Though there are still plenty of them struggling, and presumably some of them won’t survive, we also see a few of these stocks limping their way back into profitability. Hope at last?
The ‘value’ argument lies in their current and forward-looking price/earnings ratio. Meritage Homes Corp. (NYSE:MTH), for instance, boasts a trailing P/E of 17.6, while NVR Inc. (NYSE:NVR) is priced at 17.08 times earnings over the last twelve months. Their projected (2011) price/earnings ratios are in the same high-teen area, as is D.R. Horton (NYSE:DHI) with a forecasted (2011) P/E of 19.5.
While not exactly on the cheap side, the figures are at least palatable, eh?
Well, no, not really. Were it any other industry we could say yes. For homebuilders though, that’s nearly four times the average pre-bubble (pre-2006) P/E of 5.17. (And yes, you read that right - the ‘normal’ price/earnings ratio range for homebuilders is between the number five the number six.)
How can it be so? There are a handful of reasons this group has traditionally been priced at the extreme low end of ‘reasonable’, most of which are beyond the scope of our discussion today. At the heart of the matter, however, is the reality of traditionally slim margins… in the 3% to 6% range.
Barring some sort of bizarre miracle, the normal profit margins in homebuilding aren’t suddenly going to improve, which in turns means investors are paying far more for profitability here than they ever have before - and they’re not being paid for the risk they’re assuming.
OK, fine, homebuilder stocks are expensive right now. But, what if these companies could at least start making a fraction of the kind of money they were making before the bubble started to deflate in 2006?
Well, that’s actually part of the problem…. they are doing much better now than they were doing three years ago, and it’s still only a fraction of the kind of money being made in 2005. See, 2005 wasn’t just a very good year for homebuilding - it was stunningly good year, on the same scale as the tech bubble in 1999 (though at least the homebuilders performed an actual service and did actually make real money for a short time).
The nearby chart puts it all into perspective. It shows the average earnings-per-share for the top eight - by market cap - stocks in the industry going all the way back to 2000. Between then and 2003, homebuilder earnings nearly doubled. By 2007 though, the losses being taken on an annual basis were bigger than the annual gains being made just four years earlier. In fact, in the aggregate, the industry is still losing money.
A few bad apples spoiling it for everybody? Nope, and just to prove it, we also added an earnings trend line just for the companies that were on pace to be profitable this year and next year (NVR, D.R. Horton, Pulte, Lennar, Standard Pacific). Even these ‘good’ ones are still well off their peak income levels. They’ll have to quintuple 2011’s expected earnings to match 2003’s records. The industry as a whole will need to do about ten times better than its on pace to do in 2010 to revisit 2003’s record earnings levels.
Yes, things are improving, but when you start taking about earning being multiplied by a factor of five, ten, or more, it’s time for a reality check. That’s just not in the cards for years to come.
There’s a Limit
While the recession has been named as the bulk of the problem with homebuilding, there’s another, largely unspoken, reality that’s not been addressed ….and it’s a much bigger problem the industry has been and will contend with forever - houses aren’t consumables.
When you run out of food, you buy more. When your car wears out, you buy another one. You don’t pay for cable televisions once and get it forever; you have to keep paying the bull to keep getting the service.
See the illogical nature of a ‘high growth’ homebuilding industry? The more houses that are built now, the less we’ll need built later. And, considering the inordinate number of houses built between 2001 and 2006, we may have adequate supply to last us for many, many more years.
That’s a slightly different message that what the media is spewing. They’re suggesting the huge supply of real estate is the result of would-be buyers being unable to get a loan. We’re saying the huge supply of real estate is just the result of a huge supply of real estate, and even an easier-credit environment can’t do a lot to solve that problem.
Though there is some data in support of the idea, conclusional cause/effect data is tough to muster. On the other hand, the media has only presumed that crimped credit is the underlying reason for the housing glut. Either way, housing demand is finite by default, and the closer that demand is to being 100% met, the worse it gets for new home builders.
Is there anything earth-shattering or surprising about these numbers? Probably not, though it’s always better to talk specifics when money is at stake….. something the media hasn’t done yet.
Regardless, it’s an important discussion to have, as the chatter surrounding a homebuilder recovery has become louder and more frequent. You may want to consider the facts presented above before jumping to any conclusions. Homebuilding stocks’ best potential results going forward are still apt top pale in comparison to the sector’s past, even if these companies do everything right.
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The good news/bad news duality lingers…. and we have to acknowledge the scales actually tipped in favor of the good news this past week. Let’s lay out the arguments from each side of the table.
The bulls are saying….
1. The late rally on Friday is a huge testament to the ultimate conviction of the market. Buying a stock on a Tuesday at 11 am EST is one thing, as you’ve got five more hours that day to change your mind, and you’ve still got three full days after that to shed it if need be. But to choose to be long the market on a Friday afternoon (when you’re stuck with it for two whole days) is a major, and bold, commitment.
2. We just saw our fifth straight close back above the 200-day moving average line (green), and the bulls went well out of their way on Friday to score that fifth one.
3. The VIX is on the verge of breaking to new multi-month lows; the line in the sand is 21.73.
The bears are saying….
1. While the SPX may have cleared the 200-day moving average, the real test lies ahead, around 1125. That’s where the 100-day moving average line (gray) is, as well as the recent peak level. To make matters more alarming, the 100-day line was also lined up with that ceiling when the market peaked at it in June. Translation? Major hurdle.
2. Even if the 1125-ish area is surpassed, the upper Bollinger band lies dead ahead at 1141. (The longer-term Bollinger bands have been surprisingly important support, resistance, and reversal levels over the last several months.)
3. The market may be going up, but there’s a serious lack of volume behind the move. As such, this impressive move is also apt to be an errant one, and corrected soon.
It’s not difficult at all to realize we are indeed at an inflection point. It may take a couple of days for the market’s true undertow to be realized, but it shouldn’t take much longer than that - one side’s going to have to commit sooner than later. The discussions above point to the items you need to be watching most closely on charts.
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It was a wild week last week on the sector front, with some new contestants starting to jockey for leaedership roles (and some of them are even making progress to that end).
Utilities and telecom are still out on front, though utilities stocks eased back a bit later in the week, allowing telecom to move ahead for the last three months. Both were and still are ‘must haves’, however, so the shake-up is a little irrelevant.
At the bottom of the pile you’ll find energy is still at the bottom. Though it remains a laggard, our contention remains that these stocks - selectively - are also tremendous opportunities right now.
The most noteworthy (and actionable) leadership switch-up came from the sectors in the middle of the pack. Basic materials, which had been weak coming out of the April/May pullback, saw big progress last week that pushed it ahead of a few other arenas. Yet, the group still has room to move. Coupled with its new momentum, the materials stocks are also quickly becoming ‘must haves’.
Not that one week makes or breaks a trend, but it should be noted that the current performance ranking started to materialize in early June when the market first started to offer a glimmer of rebound hopes. So what? There are two points to make……(1) such trends do persist, and (2) they can be identified, if you just look for them.
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For the second week in a row we saw materials and industrial stocks lead the way, with transportation stocks (thanks to stellar results from a few railroad and trucking names) not far behind. At the bottom of the pile was healthcare - again - with gold just one notch above the bottom rung.
While a rally out of the summer doldrums still isn’t a foregone conclusion, the sector-leadership trends we’re seeing develop now are apt to be early omens of what’s in store if the bulls can just keep getting traction.
For those of you who are a little more visual, the percentage-change comparison chart may better depict how these sector trends are shaping up since the peak on April 23rd.
There’s little confusion about where the strength was last week - small caps dominated, mid caps were in the middle, and large caps lagged…. though a 3.5% ‘lag’ is nothing to be ashamed of. While market cap seemed to be more of a matter than style last week, growth is still proving to be more fruitful than value in the recent bigger picture.
And as we did with the sectors, here’s the visual comparison of returns for the major market cap/style groups, since the April 23rd top. It’s here we can see how well growth stocks are coming out of the April/May funk.
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It’s a clear good news/bad news scenario for the major indices. Let’s just approach it from that perspective, beginning with the S&P 500.
The good news is….
- The S&P 500 Index has crossed back above the 50-day moving average line (purple), which had been a resistance line with the bullishness from three weeks ago.
- The VIX is trending lower. Moreover, the VIX’s lower Bollinger band (at 20.13) is now pointed lower, meaning it’s less likely to act as a deflective floor. Rather, it just may gently catch the VIX and slowly guide it lower.
The bad news is…
- The S&P 500 is on a crash course for the 200-day moving average line (black) at 1113.4, and the upper 50-day Bollinger band at 1141. Either could halt or slow the advance, and if they combine at the same area, they could be become doubly-tough to cross.
- The VIX, though trending lower, seems to be hitting a minor floor around 23.0 (dashed)
While from a fundamental point of view the recent gains and more upside are merited, from a technical point of view we see some roadblocks in the near future. We’re getting close to the inflection point.
Since the NASDAQ’s pros and cons are similar to the S&P 500’s, we’re not going to dive into the same detail. We’ll just point out that the NASDAQ is - unlike the S&P 500 - above its 200-day moving average (black). It’s still going to tangle with its upper Bollinger band though, currently around 2363, but falling fast.
The VXN is also pointed lower… barely. It’s floor (dashed) seems to be just a hair above 23.00 as well, though we’ve not necessarily seen any real effort to push up and off that line.
As was the case with the SPX and the VIX, the NASDAQ Composite and the VXN suggest there’s a little more room for upside, but real tests are on the horizon.
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It was a light week in terms of economic data, but an important one on the real estate front - though not a great one. We did see a bump and a ‘beat’ in the number of building permits requested. There were 574K permits issued in May, and analysts were looking for 572K this time. We actually saw 586K permits issued in June, indicating that future construction activity will be stronger than the recent past.
Other than that though, real estate seems to be suffering. The National Homebuilder’s Index (a confidence index, mostly) fell to multi-month lows, housing starts were down by even more than expected, and existing home sales fell by about 5%.
New unemployment claims bounced back up to 464K, right where they’ve been hovering for weeks, and undoing an encouraging drop in the prior week. Ongoing claims did make a significant move lower to 4.48 million.
There’s a lot more in store for the coming week. New homes sales will be unveiled on Monday, with the Case-Shiller Index being updated in Tuesday; both are forecasted to show modest improvements. The same goes for Wednesday’s durable orders (even if the bulk of the improvement is aircraft sales).
On the confidence front, look for the Conference Board’s Consumer confidence figure - which plunged like a rock last month - to be released on Tuesday, while the University of Michigan Sentiment index will be updated on Friday. The former is expected to move down, while the latter is anticipated to go up.
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