bespokeinvest.com

With commodities continuing to take it on the chin on a daily basis, below is an updated snapshot of our trading range charts for ten of the most widely followed commodities.  For each chart, the green shading represents between two standard deviations above and below the 50-day moving average.  Moves above or below the green shading are considered overbought or oversold.  As you'll see in the charts, every commodity with the exception of natural gas is currently at or below the bottom of its trading range.  

Oil, gold, silver, platinum, and orange juice are the most oversold, while wheat, corn, coffee and copper aren't far behind.  If you look at the charts, over the last year, most commodities have bounced when they have gotten this oversold, so we should be due for at least a small rally soon.

While the S&P 500 is down 6.23% from its 52-week high (reached in early April), there are five sectors that are down quite a bit more than that.  These five are Energy, Materials, Financials, Technology and Industrials.  All five of these are cyclical in nature, so anyone that is overweight the so-called "risk on" trade has likely underperformed "the market" during this downturn.  Energy and Materials are down the most from their 52-week highs at -16.88% and -15.71% respectively.  It has been a bloodbath for anyone heavily invested in these two commodity-related sectors.

The five sectors that are down less than the S&P 500 as a whole from their 52-week highs are Consumer Discretionary, Health Care, Utilities, Telecom and Consumer Staples.  Four of these five sectors are non-cyclical in nature, so investors that have been overweight the defensive trade have outperformed. 

Crude oil inventories rose more than expected (2.128 million vs. 1.75 million) again last week.  This marks the eighth straight week where crude oil inventories have seen a larger than expected increase.  For the current time of year, 1990 is the only year where crude oil inventories were higher than they are now.  

On a seasonal basis, the current week is when crude oil inventories typically hit their highs for the year, so it will be interesting to see if inventories start to decline in the weeks ahead.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

The S&P 500 Technology sector is now down 9 days in a row.  Since our daily sector data begins in 1989, the Technology sector has only had one other 9-day losing streak.  That streak came in October 1998, which was another period when markets here were being roiled by bad news overseas.  September/October 1998 was the Russian debt/Long-Term Capital Management crisis.  The 9-day losing streak for the Technology sector occurred from 9/25/98 through 10/8/98.  On October 9th, the Technology sector ended its 9-day losing streak by rallying 6.13%.  Over the next 9 days, the Tech sector gained a total of 18.59%.  October 8th, 1998 ended up being the bottom of the Russian debt/LTCM crisis.  If we could only be so lucky this time around as well.

The average stock in the S&P 500 is down more than 6.5% since the April 2nd market peak.  We ran our decile analysis on the index focusing on international revenues to see how much Europe and other parts of the world are impacting US stocks.  To run the analysis, we broke the index into deciles (10 groups of 50 stocks each) based on the percentage of revenues that each index member generates outside of the US, and then we calculated the average change since 4/2 of the stocks in each decile.

As shown below, the decile of S&P 500 stocks that generate the largest portion of their revenues from outside the US are down an average of 11.1% since the April 2nd top, while the stocks that generate all of their revenues domestically are down an average of just 3.7%.  If Europe's problems continue, this trend should continue, although we're probably due for some sort of reversion to the mean since the divergence is so wide.  

To track international and domestic revenues for S&P 500 and Russell 1,000 stocks, become a Bespoke Premium member today and access our International Revenues Database.

Today's release of the NAHB Housing Sentiment index came in better than expected and (29 vs 26) currently sits at its highest level since May 2007.  In this month's report, all three subcomponents also showed increases, and they're all at or just near their highest levels since 2007.  On a regional basis, the West was the only area where homebuilder sentiment declined.  In the Northeast, Midwest, and South, however, sentiment increased.  

It is important to remember that even as the NAHB Index and its various subcomponents are hitting multi-year highs, they all remain below 50, which is the dividing line between positive and negative sentiment.  Therefore, while sentiment is clearly getting less worse, there is a ways to go before we can say homebuilders are positive. Click for charts.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

Today's NY Fed Manufacturing report for May came in stronger than expected (17.1 vs 9.5) and helped to reverse part of the decline we saw in April when the index came in at 6.6.  Even after this month's improvement, however, the index still remains below the highs we saw earlier this year.

Although the overall index for current conditions rose this month, the outlook over the next six months declined for the fourth straight month.  Likewise, plans for Capital Expenditures and Technology Spending also decreased during the month.  Continue reading.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

If it feels like the market opens lower every morning lately, it's because it has been.  Below is a chart highlighting the 20-day moving average opening gap for the S&P 500 SPY ETF.  We also highlight the 20-day moving average open to close change for SPY.  As shown, over the last 20 days, SPY has opened lower by an average of 0.13% each day.  From the open to the close, however, the ETF has actually averaged a small gain of 0.03%.  

Interestingly, the market has been getting weaker and weaker in after-hours trading since the year began.  At the end of 2011, SPY was routinely gapping up at the open by a wide margin as evidenced by the 20-day average gap of more than 0.50%.  Since peaking at the end of 2011, the 20-day average gap has drifted lower and lower.  Clearly overseas markets, which open for trading well before we open here, are driving share prices here in the US these days.

The second quarter of 2012 has so far been a complete reversal of the first quarter.  As of earlier this morning, just one stock-related ETF in our matrix below was up for the quarter -- Utilities (XLU).  Major US index ETFs are all down 4-5% for the quarter, while sectors like Energy (XLE) and Financials (XLF) are down 7%+.  

International markets have done much worse than the US.  Brazil (EWZ), France (EWQ), Germany (EWG), India (INP), Italy (EWI), Spain (EWP) and Russia (RSX) are all down double digit percentages since the start of April, and they're down 5%+ over the last week alone.  The only asset class that is solidly in the green for the quarter is fixed income, which many investors shunned like the plague as recently as March.  Oh how quickly things change.

The S&P 500 is now down more than 5% from its high at the start of the second quarter.  So how did it get there on an intraday basis?   Below is a chart showing the average hourly percentage change of the S&P 500 since the second quarter began. (Since the market opens at a half hour mark, we used the prior day’s close through 10 AM the next day as the first “hour” of the day.)

As shown, all of the index’s declines this quarter have come...

...continue reading  (Must be a Bespoke Premium member to view.)

Shares of JP Morgan Chase (JPM) are down another 2% today following Friday's 9% drop after the company disclosed trading losses of at least $2 billion.  Even after the two day drop of more than 10%, however, shares of JPM are still up 9% on the year and are outperforming the S&P 500. 

The table below shows the performance of the individual members of the KBW Bank Index so far this year.  While JPM has certainly lost its luster in the wake of Thursday night's disclosure, it is still outperforming Citigroup (C) on the year, which doesn't say much for how investors view that stock in terms of its reputation.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

The CRB Commodity index is down another 1% today, bringing the year to date decline for the index to -5.5%.  The index is now trading at its lowest level since August 2010 and is also trading below its current ten-year average price of 289.3. There was a time a few years back when the rush of funds into the commodity sector was so great that some experts questioned whether or not the sector was big enough to handle all the new inflows.  These days that doesn't seem to be a problem.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

Last week, we saw bearish sentiment in our weekly market poll reach its highest level of the year at 63%.  As shown below, participants are less bearish this week, but they're still bearish.  When asked whether the S&P 500 would be higher or lower one month from now, 55% said lower while 45% said higher.  Bears have been in control since the start of the second quarter on April 2nd, which was also the date of the market's peak.  

Each Friday, members of our Bespoke subscription services receive our Week in Review newsletter.  This report provides Bespoke's current market thoughts through commentary and the unique graphs and charts that our clients have come to love.  If you're looking to get a better grasp of the market, subscribe to one of our membership packages today and download our Week in Review newsletter.

In this week's newsletter:

• Quarter to date asset class performance
• YTD country stock market returns
• Is sovereign debt CDS getting out of control?
• The US only gets bigger.
• Earnings season: could it get any worse?
• Which sectors have benefited at the expense of others this season?
• The week in Economic Indicators.
• Jobless claims back under control?
• What are the technicals telling us about the S&P 500/Dow?
• Market corrections -- how long, how low?
• High yeild spreads may be forecasting less pain than people think.
• A closer look at economic and stock market sentiment indicators.
• US Dollar index up 10 days in a row -- what's next?
• Bespoke's commodity snapshot.
• Berkshire Hathaway vs. Gold.
• Apple vs. Cisco.
• Sector P/E ratios.

Proceed to newsletter...  (Must be a Bespoke Premium member to view.)

The S&P 500 fell just over 1% this week and closed at its lowest level since early March.  While the index is still up 7.62% year to date, it sure doesn't feel like it given the rough action we've seen for more than a month now.  So where do we go from here?  Please let us know by taking part in our poll below which asks whether the S&P 500 will be higher or lower than its current level one month from now.  We'll report back with the results before the open on Monday.  Thanks for participating!

While equities have been under pressure lately, the US Dollar has been showing strength.  Following today's gain, the US Dollar Index is currently riding a ten day winning streak.  Going all the way back to 1974, there have only been five prior streaks where the US Dollar Index rose for at least ten straight days.  The longest winning streak the index has ever seen is eleven days, so another couple of up days for the dollar and the current streak will be a record run.

Earlier today, we looked at how the US Dollar Index and the S&P 500 typically perform following each of the prior ten day streaks.  Clients wishing to view today's report can click on the link below.  If you are not currently a subscriber and wish to subscribe, sign up for Bespoke Premium today!  Have a good weekend.

US Dollar Ten Day Winning Streaks

Although US equities have been on the decline, high yield spreads, which usually rise as equities fall, have been surprisingly resilient.  Since the S&P 500 peaked on April 2nd, the S&P 500 has declined by nearly 5%.  Over that same time, high yield spreads have only risen by one basis point, from 599 to 600 bps!  Eventually this divergence will resolve itself, but which way will it be?  Will equities rebound, or will the high yield market play catch up on the downside?

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

On Wednesday we published a three-page global market report over at Bespoke Premium.  One of the tables included in the report was the one below which highlights each country's share of world market cap.  We also show where the percentage stood at the start of 2011 for each country.

As shown, the US makes up roughly a third of the world's total stock market capitalization.  The US has seen its share rise sharply over the last year and a half, increasing by 3.18 percentage points since the start of 2011.  The increase in US share has come at the expense of the rest of the world.  Of the 11 largest countries by market cap behind the US, only the UK and Hong Kong have seen their share of world market cap increase since the start of 2011.  China, India, Japan, France, Brazil and Australia have all seen their shares cut by a pretty significant margin.  And while Italy is a G7 country, it really is a non factor for the global market with just a 0.91% share.

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

Individual investors are often ridiculed as being the last to get into the market and the last to get out.  However, looking at trends in bullish sentiment suggests that individual investors may not be the dopes that many institutional investors often classify them as.  In this week's survey of bullish sentiment from the American Association of Individual Investors (AAII), bullish sentiment dropped from 35.4% down to 25.4%.  This puts bullish sentiment at the lowest level since September.

Looking at the chart below shows that bullish sentiment on the part of individual investors has been declining since February or about six weeks before the S&P 500 reached its peak.  If this was just a one-time event, we could probably chalk up the decline in bullish sentiment ahead of the market peak as a coincidence.  The reality, however, is that last year we saw the exact same pattern as bullish sentiment also declined ahead of the big drop in equities.  The fact that individual investors have shown such good timing twice in a row now suggests that they deserve more credit than many have been giving them credit for.  Perhaps they could even lend a hand to the Chief Investment Office of JP Morgan (JPM).

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.

With today's decline of 8.2%, shares of Cisco (CSCO) are now down 13% since being added to the Dow Jones Industrial Average (DJIA) back in June 2009.  The only other stocks in the index that have dropped more than CSCO since it was added to the Dow are HPQ (-38%), BAC (-35%), and AA (-15%).

Back when CSCO was added to the Dow, there were more than a few investors who were advocating that Apple (AAPL) should have been added instead.  Given that General Motors was the name being taken out of the index, the argument was that just as there was once a GM car in practically every American driveway, there was now an Apple device (and often more than just one) in most American households.

In the chart below, we have reconstructed where the DJIA would be today if AAPL had been added back in June 2009 rather than CSCO (redline) and overlaid it on a chart of the actual DJIA with CSCO included (blue line).  If AAPL had been added, the index would now be considerably higher, trading at a level of 15,459.  This represents a 20% premium to where the index is currently trading today.  Furthermore, instead of still being more than 9% below the index's all-time high of 14,198.1, the DJIA would have surpassed that level back in January and would now be 9% above those prior records.  

Now obviously we cannot rewrite history and put AAPL in the DJIA retroactively.  Additionally, if the stock was in the index, because of its high share price (the DJIA is weighted by stock price as opposed to market cap), it would have a weight of close to 25%, which would cause its own set of problems.  That being said, imagine how different investor sentiment would be today if the DJIA was at record highs?

Subscribe to Bespoke Premium to receive more in-depth research from Bespoke.