Morning News: October 8, 2015
Posted by Eddy Elfenbein on October 8th, 2015 at 7:10 am

China Shares Rise After Reopening From Holiday

Bank of England Signals Rate Can Stay Low as Inflation Weakness Persists

German Exports Register Steepest Decline in Almost Seven Years

Concern Grows That the I.M.F. May Be Overstretched

Hillary Clinton Backs CFPB in Main Street-Wall Street Debate

Amazon Challenges Etsy With Strictly Handmade Marketplace

For Volkswagen, New Questions Arise on U.S. Injury Reporting

Gannett Reaches Deal to Buy Journal Media

Dell Is in Talks With EMC Over Possible Merger

Blackstone to Buy BioMed Realty Trust in $8 Billion Deal

Pure Storage Falls After Raising $425 Million in Tech IPO

Anheuser-Busch InBev Says It’s ‘Surprised’ by SABMiller Rejection

Fiat Chrysler, U.S. Union UAW Reach Tentative Agreement

Joshua Brown: Risk Ratio Charts Breaking Out (Relatively Speaking)

Cullen Roche: Why Are Corporate Profit Margins So High?

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The Cyclical Rally
Posted by Eddy Elfenbein on October 7th, 2015 at 11:40 am

The S&P 500 continues to charge higher. The index made a run at 2,000 this morning, but it has since backed off. We got as high as 1,999.31. With a number like that, I assume traders took note.

The recent rally has been led by Cyclical stocks. By that, I mean stocks in three sectors: Energy, Materials and Industrials. Here’s a look at the relative strength of all three.

I apologize for having two black lines, but I couldn’t find another way to do it. The Industrials line is the lower one in late July but ends as the highest of the three by today. Energy is red and the other black line is Materials (if that helps clear things up).

Naturally, this is a turn to Cyclicals after a long stretch in which they lagged.

Morning News: October 7, 2015
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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?
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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!”
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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:

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?)