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In
This Edition... |
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Have
the bulls already worn out their welcome, and invited the pullback so many
are assuming is already on the way? The chatter says yes, but the data
says no. The reality of the rally's longevity is below.
After that,
a handful of sector and industry calls. 'Nuff said.
First though,
we want to direct you to a recent blog entry that's chock-full of information
you need, but information you probably don't have.... stock
valuations and growth rates at the sector level. Let's just say not all
is as it seems if you're looking at P/E ratios alone. You can get the whole
scoop by reading "Sector
Valuations.... What 'Should Be' Versus What Is.
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Bulls
Not At the End of the Line Yet |
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Though the market's
breadth and depth have been the focal points for the bulk of our recent
market timing commentary, they aren't the only tools we keep in
the arsenal. Though discussed less often, we make equal use of sentiment
indicators..... indicators that tell us where the market is in the peak/valley
pattern that we can ultimately use to time entries and exits.
More importantly,
one of the current sentiment tools suggests there's actually room for quite
a bit more bullishness from the market.
Along the same
lines as the VIX (S&P 500 Volatility Index) or one of the Rydex-based
(Nova and Ursa funds) sentiment ratios, the number of put options
traded in comparison to the number of call options traded for any
given day can tell us a great deal about what the aggregate market is thinking.
Like all the other sentiment tools, the key to a trend's longevity is a
balance of those two numbers, while reversals tend to occur when the imbalance
hits one of the extreme ends of the spectrum.
Clear as
mud? Don't worry - we've got an example.
 Simply
stated, put/call ratios indicate net bearish or bullish opinions, in that
the greater the number of out options bought, the more bearish investors
are thinking. Conversely, the greater the number of calls that are traded,
the more optimistic investors are.
A put/call ratio
can be calculated in a lot of different ways, like by the exchange (CBOE,
NYSE, etc.), by the type of underlying security (equities, or indices too),
and even by index constituents (like the S&P 500's stocks). By and
large, however, all those put/call ratios move in tandem, peaking and bottoming
at the same time.
Just because
it's one of the biggest and broadest, we tend to focus on the NYSE's put/call
ratio; this is what appears along with the S&P 500 on the nearby chart.
This same chart also illustrates just how beneficial such a sentiment tool
can be.
Though not this
perfect
over the long haul, all of the major short-term swings for the market began
when the NYSE put/call ratio was at an extreme reading, as indicated by
a brush with its Bollinger bands (blue). Each type is marked on the chart
with an arrow (green = bullish, red = bearish).
Like we said,
it's not usually this cut and dried. Even at a fraction of the accuracy
we've seen from the NYSE put/call ratio's peaks and troughs at spotting
market reversals though, we'd be crazy to ignore the data. Better still,
when
combined with other market timing tools like breadth and depth, proper
sentiment analysis can lead to ridiculously effective market timing.
Anyway, we don't
bring the strategy up to sell you on the idea - we bring it up to point
out that despite the market's recent strength, the put/call readings
are still quite tame...nowhere near an extreme low that tends to flag a
short-term top. We really won't need to worry until the NYSE put/call
ratio falls to the low 60's, where the lower Bollinger band is now. We
can afford to remain bullish in the meantime.
We're going
to check in on this put/call ratio chart from time to time along with our
other timing tools. Though short-term in nature, the long-term war is won
with short-term battles.
Though bullish
in the short run, in the grand scheme of things the market is still in
limbo... and it's likely to keep most sectors and industries locked into
the same listlessness until the bulls or the bears can break us out of
the rut. There are a handful of industry indices, however, that
appear to be moving well enough on their own that they don't need the market's
help. Of course, not all of these independent trends are bullish. Here's
a look at the more trade-worthy ones.
 Pharmaceuticals
This rally has
largely been of the radar for a couple of reasons, the first of which is
that the selling efforts since May have been able to attract a lot more
attention than the buying effort of the pharmaceutical group has. The second
reason this was a stealth rally - the gains have been so modest, nobody
really cared (or cares).... except us.
While rapid
gains would be nice, reliable gains will work just as well. And as you
can see on the nearby chart of the S&P 1500 Pharmaceutical Index, higher
highs and higher lows have been reliable since late May.
The bullish
clincher from here would be a move back above the 100-day moving average
lie at 297.
 Managed
Care
While not as
consistent as the rally we've seen from the pharmaceutical industry's stocks,
the S&P 1500 Managed Healthcare Index has done one thing the pharma
index - nor most indices - haven't been able to do lately.... move
above its 100-day moving average line. Even without the milestone move
though, the group has been in a strong uptrend since early July.
Though the onset
of a sweeping overhaul to the healthcare system was the underlying reason
for the big pullback, as the dust continues to settle, the most dire (and
overblown) assumptions about the President's reform law are dissipating.
What remains are several single-digit P/E stocks (past and projected) that
aren't nearly as threatened as first thought.
 Gas
Utilities
Considering
how well the overall utilities sector has been doing of late, it's a bit
of a surprise to see any of its constituents doing poorly. One of them
is though.... gas utilities. And more importantly, given the shape of its
chart, odds are good things will get worse for these stocks before they
get better.
The key problem
here is the recent cross of the 100-day average line under the 200-day
average line, though the underlying problem is more fundamentally-based.
With demand for power starting to taper (already short of expectations)
on top of deteriorating natural gas prices, there's not a lot to look forward
to. Thing is, neither of those conditions is anticipated to change anytime
in the foreseeable future.
 Household
Products
Think household
products and consumer staples stocks are a safe place to hide when things
get rough for the market? Think again. No sector or industry is immune
to drawn-out selloffs. Take a look at the nearby chart of the S&P 1500
Household Products Index. It started to fall apart in late March, and hasn't
been able to come up for much air since then. The bears don't appear willing
to let go anytime soon either.
And here's the
really crazy part.... these stocks probably deserve to be sold some more,
since they're overvalued as is.
Like we pointed
out on Tuesday,
the consumer staples sector is only apt to foster slow growth over the
next four quarters (6.8%). No big deal, but with a trailing twelve-month
P/E of 14.7, that translates into a hefty PEG ratio of 2.67 - well beyond
what most investors would consider acceptable.
As always, we'll
highlight other emerging trends as they take shape.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
