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Five Things You Need to Know: Black Friday Boom/Bust?; How It Starts; NYSE High-Low Index; What Is the S&P 500 Telling Us?; Subprime Now 1,000% Contained!

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What you need to know (and what it means)!

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Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Black Friday Boom/Bust?

Two preliminary retail sales reports are now out. ShopperTrak says Boom! National Retail Federation says Bust! Which one to believe?

  • ShopperTrak RCT Corp. reported an 8.3% gain in sales the day after Thanksgiving, a bigger increase than it expected.
  • "Consumers remained resilient and proved they were willing to spend even with oil prices rising and other economic pressures," ShopperTrak said yesterday in a statement.
  • Meanwhile, the National Retail Federation said that while 147 million customers, 4.8% more than last year, made it out to stores on Black Friday, shoppers spent 3.5% less per person.
  • So, who should we believe, and does this preliminary report even matter?
  • The discrepancy - an 8.3% gain in sales according to ShopperTrak and a 3.5% decline in average spent according to the NRF - makes sense if we sort through how stores handled the traditional kickoff to the holiday shopping season this year: longer operating hours and higher discounts.
  • The bottom line, literally, is that stores spent more, both in terms of operating costs and discounts, to increase sales while shoppers paid less.
  • In the real world that's deflationary.
  • In our world it's a "surprisingly resilient consumer kicking off another boom in retail sales."


2. How It Starts

This is how it starts. What began as something isolated to "those subprime people" - the psychology of cutting back expenditures, of increased savings and reduced credit appetites - begins to slowly trickle up to middle and upper middle class Americans, even to the elites.

The New York Times on Sunday featured an interesting article outlining the resurgence of temperance and cost cutting among elites. "Against the backdrop of an unpopular war, rising oil prices and a subprime mortgage crisis, a certain thriftiness seems to have crept into the city's dining rooms," the Times observed. "As a recent article in Vanity Fair lamented, the days of glamorous Washington dinner parties are long gone. Indeed, some hostesses today aren't above serving Costco salmon, nicely dressed up with a dollop of crème fraîche."


3. NYSE High-Low Index

We interrupt this bear market to... what, "they" keep saying it's not a bear market? Then what do "they" call the following:

  • More than 60% of stocks in the S&P 500 are on point and figure sell signals, and almost 70% are below their 200-day moving average.
  • The S&P 500 Equal-Weighted Index is now down more than 1% year-to-date; it's been the large cap stocks that have buoyed the index, with the S&P 500 clinging to a 1% year-to-date gain.
  • The PHLX Bank Index is down 21% year-to-date, and another 14.8% for the current quarter.
  • The PHLX Housing Sector Index is down 43% year-to-date, almost 19% in the current quarter.
  • The PHLX Semiconductor Index is down 11.6% year-to-date, but a whopping 18% in the current quarter.
  • The Dow Jones Transports are off 9% in the current quarter.
  • Oh, did we mention the fact that the S&P 500 is up 1.7% over the past rolling eight-year time span?
  • Man, if only we had invested in the iShares 1-3 year short-term Treasury Bond Fund (SHY) on November 26, 1999. We'd be up 23%... with considerably less risk.
  • The SHY had double the S&P 500 performance year-to-date as well, up a little more than 3%.

Call it what you will - those are just numbers after all, and we live in a world where numbers are whatever you want them to be - to us that's not exactly the stuff of bull markets. Still, nothing goes up or down in a straight line, so today we wanted to bring to your attention to the high probability of at least a temporary pause in this bear market.

One of our favorite indicators is the NYSE High-Low Index. We wrote about this indicator back on August 7 and again on August 27 as it reached the tremendously oversold level of 8%.

According to data from Investors Intelligence it is now at 10.7%, a very washed out level, and near where the August reversal occurred. Why is this important? This indicator does not reach such low levels very often. The move to 8% in August was the lowest level this indicator had reached since July, 2002.

Prior to 2002, the lowest level for the NYSE High-Low was September 1998, when it reached 6%.

A reversal up in this indicator, when it occurs, sets up a tradable rally for very short-term aggressive traders, but for those with longer-term timeframes it creates the opportunity to reposition portfolios, ejecting positions in weak relative strength sectors such as Financials, Real Estate and Insurance. The primary bullish percent indicators for equities remain negative for now.

NYSE High-Low Index
CLICK TO ENLARGE



4. What Is the S&P 500 Telling Us?

The key question for equity markets here as we near a potential pause on the way down: Is the worst behind us? We're not so sure.

We believe credit market issues continue to be underestimated, and that the unwinding of a bubble in debt will have far greater economic impact than is currently being discounted. Still, we are not dogmatists. We listen to the markets and when they tell us to become more bullish, we become more bullish. The problem is that, at least so far, the markets seem to be saying something important has happened to conclude the bull run from October 2002, not kick off the next leg.

Take a look at the chart below of the S&P 500. It shows a clear break of a long-term multi-year trendline, and the pattern (a triple bottom break, followed by a double bottom break) is what is called a bearish catapult pattern.

S&P 500 Index, courtesy Stockcharts.com



5. Subprime Now 1,000% Contained!

According to the Financial Times, a California-based hedge fund has generated a more than 1,000% return this year by betting against US subprime home loans.

  • Lahde Capital, a fund that was set up in Santa Monica last year by Andrew Lahde, last week passed the 1,000% mark after fees, making it one of the world's best-performing funds of all time, the FT reported.
  • The performance of the fund makes it one of the best performing funds of all time.
  • Mr. Lahde, whose fund is one of the smallest specialists shorting subprime, has now begun to return money to investors, the FT said, telling them in a letter: "The risk/return characteristics are far less attractive than in the past."
  • Has Mr. Lahde now turned optimistic on the market? Not exactly.
  • In his letter, Mr Lahde said he expected the collapse in value of subprime mortgage-linked securities to be repeated for bonds backed by commercial property loans next.
  • "Our entire banking system is a complete disaster," he wrote, according to the FT.
  • "In my opinion, nearly every major bank would be insolvent if they marked their assets to market."
No positions in stocks mentioned.

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