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In
This Edition... |
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What a week,
huh?
On Monday the bulls were euphoric. That bubble burst on Tuesday though,
and sent the market tumbling all the way through Friday afternoon.... before
the bulls stepped back in a few hours before the week's closing bell. All
told, the market effectively broke even for the prior five trading days
- but what an incredible (and telling) five days.
We'll look at
some of the largely-unnoticed details below. After that, we want to update
chart of new and ongoing unemployment claims. Both boats are getting rocked
a little bit, but the media isn't looking at the 'bigger picture'. So,
we
will. We'll wrap things up with some thoughts on the editor's 'sandbox'
portfolio; he's got one exit and one new trade entry.
Before we get
to those items though, we want to direct your attention to a couple of
important blog entries from earlier this week:
The
bulls fought hard to get back in the black on Friday, and in so doing,
almost ended the week with a gain. Whether the week was a winner or
a loser isn't really even the important part though - it's the intra-week
transition that we're interested in..... Friday's in particular.
Why's that?
Because
Friday is the "take 'em home" price - a commitment of sorts, since stocks
can't be sold for a whole two days (a virtual eternity in this environment).
In any case,
we saw something bullish on Friday aside from the modest gains - volume....a
great deal of buying volume, particularly for a Friday.
 What
happened? After all, the sellers were in control for the majority of
the past four trading days.
It sure wasn't
great economic news. Unemployment claims (which we look at below) were
tepid at best, real estate values (which
we blogged about this week) are still struggling, and the number of
earnings 'misses' seemed to ramp up a little bit. Yet, investors still
wanted to make sure they were in the market rather than out of it
when push came to shove.
There are a
handful of explanations, though all of them stem from the same ultimate
reason..... investors still see value in stocks, despite what they say,
and despite the minefield of reasons not to. That's not to say they don't
know the risks. They just see the rewards as being slightly greater.
Well,
that, and the fact that fair valuations are far more subjective
than objective for investors.
 Consider
it another layer of evidence to the theory we posed last week - that
sometimes stocks don't move for any rational, clear, or logical reason...
sometimes
they just move because they do. When you accept that fact, your investing
nimbleness swells up considerably.
Anyway, as far
as a forecast is concerned, we're taking Friday's buying volume as well
as the recent bullish
clues on the breadth and depth front (see the blog entry we linked
to above) at face value, and cautiously siding with the bulls.
Understand,
however, that the S&P 500 needs to make its way above the 200-day moving
average line (red, at 1114) sooner than later, as buyers aren't compelled
by stagnation. They will be compelled, however, by hurdling that
moving average line once and for all; it's been a problem area since May.
And if for some
reason the SPX slides back under the support at the 50-day moving average
(at 1081), then we'll have to revert back to a short-tern bearish view.
That's the low-odds possibility at this point though, given the breadth
and depth undertow.
Hang tight -
we're almost there.
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What's
a 'Good' New, Continuing Claims Number? |
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If you were
excited about the fact that new unemployment claims hit a multi-year low
of 427K two weeks ago, then you were probably disappointed to see
them back to 464K last week, and only down to 457K this week. Perhaps joblessness
is not shrinking after all.
 Or,
could
it be that it is shrinking, but doing so at an imperceptible snail's pace?
That's actually
the case here. The four-week moving average of the initial claims figure
(which for some reason has been deemed 'the right way' of gauging the trend)
is pointed lower. Of course, it's pointed lower several times over the
last seven months, but new unemployment claims really never broke out of
their rut between 440K an 478K. When you take a stop back and look at this
longer-term chart though, there's a hint that the trend is pointed
downward.
In any case,
to answer our own question, a 'good' new unemployment claims figure is
anything under 440K, which we've only seen once (three weeks ago) over
the last seven months even though we've been dancing with that line
the whole time. Of course, just one week's reading under 440K isn't going
to cut it - we need to see a few of them under that line, so
much so that the four-week average gets and stays under that
level.
It's a bit higher
than the accepted industry 'norm' of 400K new claims per week being an
indication of economic health. Bluntly though, those days may be gone forever.
In the 'new' economic environment (not to mention the larger population
now), 440,000 new unemployment claims per week may well be 'healthy' on
a relative basis, as some jobs cut in recessions are never filled
again.
Anyway, there's
your line in the sand.
The equivalent
make/break line for the continuing claims figure is 4.48 million.
The continuing claims data has behaved similarly to the new claims figure
in that regard, moving sideways for the better part of seven months, but
- for the most part - unable to move under 4.48 million for
any meaningful length of time.
Like the new
claims chart, the ongoing claims graph does 'feel' like it's pointed
lower; its four-week moving average is pointed lower. Until it actually
gets and stays under 4.48 million though, investors aren't going to care.
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From
the Editor (Plus a Pick) |
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Thanks for all
the great feedback about my 'sandbox' portfolio, where I can unofficially
keep track of (and test) many of the stock ideas and sector trends -
and market timing outlooks - I talk about within the newsletter and
the site. It looks like our readers are having as much fun following it
as I am managing it. [Note that we still intend to post official MCP
picks going forward - the sandbox portfolio is just my virtual playground.
That's not to say you can't swipe some ideas from it though.]
 And
speaking of managing it, it's time to make the first public executive decision,
and dump one of the weak holdings.
For those of
you who've been following the portfolio, you won't be surprised to hear
me saying I'm carving out PDF Solutions (PDFS). It's been dead weight
for too long, and last week's dip was the proverbial straw that broke the
camel's back. I've already issued a market order to sell it on Monday.
Fortunately,
I already have something in mind I want to replace PDFS with.
It's HSN
Inc. (HSNI), though you may know it better as 'Home Shopping Network';
there's clearly not much need to add to the description, as even if you're
not a customer, it's clear what they do, and how pervasive their marketing
reach is. It's the underlying numbers that surprised and compelled me.
How any retailer
(or middle-man, in this case) of the ilk has a sub-20 trailing P/E is beyond
me, but HSN does. The forward-looking one (2011) is an even more attractive
13.8. And for the record, HSN Inc. has been beating the daylights out
of earnings estimates.
The chart looks
good too, just coming out of a prolonged dip between April and May, and
boasting a modest history of surviving the market's bearish curve balls.
It's sexy by no means, but it's a high-odds play with big momentum (up
nearly 200% over the last twelve months)
As for the portfolio,
the sandbox is up 2.9%, versus the S&P 500's gain of about 0.5% during
that time. That's not a huge difference, but considering I'm only about
2/3 invested, and that it's only been about two months, I'll take it.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
