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Record breaking 1st quarter - what now for 2012
- 1. Record-Breaking 1st Quarter – What’s Next for 2012? Joe Bell Senior Equity Analyst/Trader Schaeffer’s Investment Research, Inc.
- 3. What to Expect Intro to Expectational Analysis Technical Look at Today’s Market Fundamental/Economic Analysis Where are we in the Sentiment Cycle? Sectors 3
- 5. Technical Analysis – Long Term 5
- 6. Technical Analysis - Intermediate 6
- 7. Technical Analysis – Short Term 7
- 8. Small Caps 8
- 10. Research Studies on Strong 1st Quarter ◦ SPX = +13.5% return Goal – Find out whether a strong first quarter indicates what the price action will be for the rest of the year. 10
- 11. Normal Returns 11
- 12. Strong vs. Weak Quarter 12
- 13. Other technical factors Presidential Cycle Sell in May, Go Away? 13
- 14. Technical Picture 14
- 15. Employment 15
- 16. Unemployment Rate 16
- 17. 2012 Earnings Growth 17
- 18. Personal Spending 18
- 19. Retail Sales 19
- 20. Housing Data 20
- 21. Record Cash Held by Companies •Mergers & Acquisition •Share Buybacks •Increased Dividends 21
- 22. Sentiment Analysis Investor emotions and expectations Going against the crowd 30 years of experience 22
- 23. Sentiment Cycle 23
- 24. Type of Sentiment Indicators Anecdotal ◦ Media, blogs, Twitter, friends & family, magazine covers Surveys/Forecasts Quantitative ◦ Option activity, option open interest, put/call ratios, implied volatility, short interest, analyst ratings, inflows/outflows 24
- 25. The Wisdom of the Great Sanhedrin 25
- 26. Probably the Most Famous Contrarian Magazine Cover 26
- 27. October 2009 Cover 27
- 28. Recent Magazine Covers 28
- 29. AAII Survey As of 4/12/12 29
- 30. Investors Intelligence 30
- 31. Recent Strategist Surveys CNN Money Survey Reuters Recent Survey Bloomberg Strategist Allocation Poll 31
- 32. NAAIM As of 4/12/12 32
- 33. U.S. Equity Mutual Fund Flows OUTFLOWS SINCE MARCH 2009 $273 Billion = As of 4/12/12 33
- 34. Total Bond Mutual Fund Flows As of 4/12/12 34
- 35. Hedge Funds Hedge Fund Index fell 4.27% in 2011 1st Quarter Underperformance 35
- 36. VIX Hedging Activity As of 4/12/12 36
- 37. Analyst Expectations for 1st Quarter 37
- 38. Earnings Season So Far 38
- 39. Sectors with Low Expectations Pct of Spread Analyst Ticker Stocks (pct above - Sector Percent s Above analyst pct Buys 200dMA buys) Banks 98 83% 37% 46% Buildings 67 82% 42% 40% Savings and 12 75% 36% 39% Loans Real Estate 106 78% 41% 37% Insurance 76 76% 46% 30% Utility Gas 62 65% 35% 30% Restaurants 33 76% 47% 29% 39
- 40. Sectors with High Expectations Spread % of Stocks Analyst Sector Tickers Above Percent (% above - 200dMA Buys analyst pct buys) Coal 15 0% 57% -57% Precious Metals 31 13% 61% -48% Steel Iron 18 11% 57% -46% Metals Non Ferrous 41 24% 52% -28% Oil Service 61 36% 64% -28% Oil 107 35% 58% -23% Biomedics Genetics 98 45% 62% -17% 40
- 41. Concerns Short-term ◦ Small- & mid-cap recent underperformance ◦ MACD divergence on small caps, breakdown from rising wedge pattern on SPX & RUT ◦ Low hedging activity doesn’t indicate accumulation by hedge funds just yet Long-term ◦ Europe & China ◦ Unemployment still high / Recent Jobs Data 41
- 42. Putting It All Together Strong Uptrend ◦ Short-term technical concerns Improving Fundamentals ◦ Uncertainty from Europe & China Negative Sentiment 42
- 43. Where are we at? 43
- 44. Think Like a Sentimentician “Cheap” can always become cheaper Look for stocks that have low expectations, therefore avoiding the crowd Low expectations translate into potential buying power Success comes from buying low expectations, not “low” prices 44
- 45. Follow us on Twitter @joebell_trader @schaeffers @ryandetrick @brysapp @tvenosa 45
Editor's Notes
- Technical Analysis 1,500 is near 2000 peak and October 2007 peak ahead of the financial crisis. Currently in uptrend, we have see higher highs and higher lows. Recently broke above the previous peak of 1370 and made a higher high.
- Trendlines are mostly sloping upward, although some of them are starting to go sideways. We are still above April peak, which could be an area of support. A little closer look at the uptrend and strength of the market.
- Rising Wedge Pattern (indicated by the blue lines) – the rate at which the higher highs are slowing as it reached the peak. We broke this reversal pattern on April 9. * We are trading near 1360-1370 area which is potential price level support here. If we break below here, the next potential area could be Fibonnaci Retracement Levels – Generally, retracements of 61.9% or more, the trend can potential change. 50% retracement area also coincides with the October 2011 highs. Double low of 666 = 1332 area which could be potential support area
- Rising Wedge pattern, which coincides with similar patter on large caps and SPX 780 area is key support area during intermediate term 750 area would be next logical support area
- Parameters of Study: We first looked at what an average first quarter looks like and what the average “rest of the year return” was We then looked at what a positive return during first quarter meant for the rest of the year and what a negative return during the first quarter meant for the rest of the year. Then, comparing them to the normal returns, we can evaluate if there is any type of correlation.
- Highlights – This was over past 30 years.
- Presidential Cycle – Typically, the 3rd year of the presidential cycle is the most bullish because current President will do what they can to make economy look better or put it in more positive light to help get reelected. Election year of a presidential cycle can be a little more volatile as debates sent mixed signals to investors, but is the 2 nd strongest year of cycle. Sell in May, Go Away – Sold in start of May and put into cash, then stocks are bought again in the autumn, typically around halloween. Studies have actually shown that on an average return basis, June, July, August, September, and October have all underperformed the other months of the year, with September & October being the worst. On the flip side, the instances where May was strong and actual studies done where you sell on last day of April and buy on last day of October actually proved to slightly underperform holding the position since January 1950.
- Fundamental Analysis – financial ratios, earnings, dividends, financial projections, economic forecasting Highlights – Nonfarm payrolls added 120,000 new jobs in March, down from 240,000 jobs in February and well below the consensus of 200,000 jobs. The report was definitely disappointing and is what sent the market lower on the Monday following Good Friday Some are attributing this to the warmer than normal winter weather that shifted the hiring phase a little bit and moved some of the typical spring hiring into January and February. Nevertheless, investors will be looking toward April and June to see if this was just a one month hiccup or an indication of the rate of growth drastically slowing in March. 27- straight weeks of positive
- Recent data showed rate fell from 8.3% to 8.2%, but the drop was due to 333,000 leaving the labor force and not from an improvement in employment. The important takeaway is that the labor market has been improving and is continuing to improve, but the rate of growth is something investors are starting to become a little uncertain about and potentially why we have started to see a little increase in volatility.
- Personal Spending was better-than-expected in February and has been increasing steadily for past couple years. This is going to be greatly tied to the employment sector as well, so the rebound in spending will only be maintained if employment strengthens in near future.
- Consumer Demand remained strong in March as retail sales increased another 0.8%. This was much better-than-analyst expectations. Encouraged by retail sales as well, consumer discretionary stocks in U.S. have performed quite well. Long-term, this is another indicator that will be tied to labor sector.
- You can tell from the chart how low housing starts have been, but you can also notice how it has been in an uptrend during the past couple years. Fed has stated that they are focused on housing recovery, with potential for leaving rates low until 2014. This is all helpful for housing recovery. Home building stocks have also performed extremely well and quietly led for much of the rally during the past 6-8 months
- Biblical land of ancient israel.
- Declared equities dead in 1979, just before the biggest run up in stocks prices in the world’s history. Stocks don’t die…they just go through tough times.
- This was after the financial crash and the S&P 500 has rallied 40% from this time.
- Time Magazine – April 2, 2012
- Bullish Retail Sentiment at lows of the year (28.14% lowest level since September 22, 2011. even though we have pulled back, we are still up 8% for the year 72% (Neutral + Bears) most elevated since September 22, 2011 41.56% Bears highest since October 6, 2011 Previous breaks of the 30% bulls have marked some short-term bottoms in the SPX going back to 2009.
- Bullish Optimism has decreased and bearish has increased in recent weeks. Significant optimism can be expected given the strong market, although Bulls – Bears Line is currently at 20%....40% is generally an optimistic extreme based on history.
- CNN Money Survey – A big money poll of 20-25 big strategist and we were actually one of the company’s polled. The average target from all of the people polled was 1434, which is barely above recent Reuter’s Recent Survey – another recent poll and average target was 1427. Bloomberg Strategist Allocation Poll – Survey of Wall Street strategists recommended allocation to equities. Latest update a few weeks ago showed they recommend and investor hold only 55.3% of their portfolio in equities. Since 1998, the only time they recommended less exposure to stocks was from January – August 2009 (which turned out to be a very poor time to have low exposure).
- Ask managers what their current exposure to equity markets is from -200% leveraged to +200% leveraged Active managers cut their exposure to stocks by the largest amount since late November. We have seen peaks above 85, whereas we are currently only slightly above 50%.
- We saw another $4.27 billion pulled from U.S. equity mutual funds, the highest amount since early 2012. Since 2007, we have seen 5 straight years of outflows. This year, once again we are seeing even more equity outflows. So far, about $19 billion has been taken out in 2012. Since the March 2009 bottom, the market has rallied about 105% and we have seen $272.6 billion in equity outflows
- The last 5 years, $800 billion into Bond funds and about $450 billion out of equity funds. 100 largest pension funds actually have more money allocated to bonds than stocks, which is the first time this has happened since the survey started. Pension funds have historically been terrible market timers.
- In September, 1 st Quarter earnings expectations were at +10%, by start of year they were down to +4%, and ahead of earnings season, we are seeing estimates between 1 and 3% = VERY LOW EXPECTATIONS.
- Quarterly earnings this round have been surprisingly strong. Of the 113 companies in the S&P 500 that had reported quarterly results as of early Friday, 92 beat expectations, while 12 matched and just 9 came up short, according to Capital IQ. Analysts are expecting overall S&P 500 first-quarter earnings to climb 6%, with revenues edging up 5%. Anxieties remain, however, about the European crisis and the question of whether large economies such as Spain and Italy may be drifting towards crisis.