According to Bespoke, as of Monday, only 16.33% of stocks in the S&P 500 were trading above their 50-day moving average, which is a lower percentage than 96.2% of all days since 1990. This is the first time since May 22, 2012, that this number has been below 20%. Is this a bullish or bearish sign? The jury's still out, but the economic data rolling in today are not inspiring no matter how many people shout "oversold" and "buy buy buy" from the rafters.
Markets closed well off their highs again on Tuesday, with the S&P 500 up less than 0.2% after rising as much as 1.3% during the day, repeating the pattern we've been seeing lately. This may indicate long positions looking for an intraday bounce opportunity to sell or simply hesitant buyers dipping their toes into the murky waters. When that upward bounce hits, selling begins, which quickly drives the index down further ... and repeat.
While CNN Money's Greed & Fear Index is firmly in the fear red zone, the Chicago Board of Trade Volatility Index (VIX) has been climbing in response to the S&P 500's falls. Through last night, the VIX was up nearly 100% as of Tuesday's close from its August 22 low and up again today. Hawkins partly attributes this to the central bank-generated period of hyper-stability coming to an end alongside the wind up of quantitative-easing tapering, but Versace sees it more as a rise in uncertainty -- the eurozone economy, a slower China, ISIS and Ebola anyone? None of those issues were in the forefront four months ago.
It isn't just stocks that are experiencing a wild ride; in what appears to be a panicked market earlier this morning, the 10-year Treasury yield declined to 1.86% from Tuesday's close of 2.20%, a full 0.34% drop! Can you say flight-to-safety risk-off?
The dollar continued to strengthen Tuesday, with three different currencies (SEK, NOK and GBP) losing over 1% yesterday versus the dollar alone; with this trend we believe commodity prices will continue to weaken. Oil, for example, took yet another serious drubbing yesterday, experiencing its worst one-day collapse in four years. Energy shares in the S&P 500 are now down 20% from their peak in June after the International Energy Agency said that demand would expand this year at the slowest pace since 2009. Chevron (CVX) lost more than 2%, leading declines for the S&P energy companies.
In mid-June, West Texas Intermediate (WTI) was up nearly 12% for the year, while Brent Crude was up almost 7%. After the recent beating, Brent closed down yesterday more than 21% for the year, with WTI off nearly 14%. The growing question is what will the Middle East do if oil hovers near $80 a barrel over the next several quarters?
While the price of oil is giving us signs of slowing global growth, the biggest railroad in the eastern U.S., CSX Corp. (CSX), beat third-quarter earnings per share expectations of $0.48, hitting $0.51, compared with $0.45 a year earlier. This was after having rebuffed merger overtures from Canadian Pacific Railway (CP) last week. The improvement was based on an increase in freight volume in most markets, thanks to a 3% rise in merchandise volume first quarter-to-date, an 8% rise in intermodal volume first quarter-to-date, and rising demand for oil transport via rail.
CSX shares rose 2.9% in after-hours trading, with the stock price up 17.31% for the year by the end of Tuesday. Confirmation will come from Kansas City Southern (KSU) later this week as well as trucking firms in the coming weeks. This leaves us thumbing through oversold stocks that derive a significant portion of their revenues and earnings right here in the U.S. With that in mind, Versace recently scaled into American Railcar (ARII) shares inside The Thematic Growth Portfolio.
Over in financials, BlackRock (BLK) beat expectations, with third-quarter net adjusted earnings of $5.21 per share, versus consensus estimates of $4.67.
JPMorgan Chase (JPM) swung to profit in the third quarter, earning $1.36 per share, versus a loss of $0.17 in third-quarter 2013. Investment banking fees rose 28% in the quarter, year-over-year, reflecting an uptick in mergers and acquisitions. The company reported a slight increase in revenue from its consumer banking group, despite a big slowdown in mortgage volumes, which had previously been helping its bottom line. The bank expects to cut 7,000 employees from its mortgage operations this year, with 6,000 positions already on the chopping block.
There's a similar story over at Wells Fargo (WFC), which is the largest home lender in the U.S. Slowing demand for mortgages as the refi-boom fades has hurt the company's net interest margin, with this measure of profitability declining to its lowest level in at least 20 years. Mortgage banking revenue in the third quarter fell 5.2% from the preceding three-month period. Net income for the company improved to $1.02 per share from $0.99 a year earlier, meeting analyst expectations.
Citigroup (C) managed to beat third-quarter estimates thanks to bond-trading revenue and improved commercial lending. Third-quarter income was up 6.6% to $1.07 per share ($1.15, excluding special items) from $1.00 a year earlier and estimates of $1.12. The bank announced that it will exit consumer banking in 11 markets, again reflecting the challenges in the mortgage industry. As we've often mentioned in this column, housing and its related industries will continue to struggle until household income levels improve, and we see the Wells results confirming that view. And the deflationary pressures we see emerging don't make it look like that is something we'll see soon!
On that note, today we saw more signs of deflationary pressures, as the Bureau of Labor Statistics announced that the Producer Price Index for final demand decreased 0.1% month-over-month in September, versus expectations of a 0.1% increase, with the index for goods falling 0.2% and services declining 0.1%.
While the U.S. economy has clearly taken the lead as the engine for growth, it seems to be an engine stubbornly stuck in first gear. Corroborating that sobering view, September Retail Sales ex-autos disappointed, despite the drop in gas prices. Any strength we did see in September Retail sales was attributed, by the Bureau of Labor Statistics, to the debut of Apple's (AAPL) iPhone 6. Strong pre-sales in China as well as a strong domestic debut and the launch in more countries bodes well for Apple as well as key suppliers like Qualcomm (QCOM), Cirrus Logic (CRUS) and, of course, Skyworks (SWKS).
Switching gears a bit, we've commented here a few times about the potential for the Alibaba (BABA) IPO to have signaled the market's top. If we look at all recent IPOs, there is a troubling trend. Finance professor Jay Ritter of the University of Florida has been tracking all IPOs since 1980 and recently reported that 72% of this year's IPOs and 64% of IPOs from 2013 have reported negative earnings. According to his data, the "normal" level of IPOs without profits is 30% to 50%. The record was set in 2000 when 80% of companies filing for an IPO were losing money. While we are not quite in this danger zone, it does give Hawkins pause. Meanwhile, Versace is not calling her Debbie Downer just yet.
