October Newsletter
October 1st, 2008
The year long bearish trend continues with a downward exclamation! Does it point to an incipient deep recession or evidence of professional accumulation?
Overview:
The stock market has been in a bearish trend since making a high last November. Stocks went lower into January 23rd marking the bottom of the bearish trend channel. The next leg up brought stocks to a lower high than January 23rd on May 19th thereby marking the top of the bearish trend channel. Since then stocks confined themselves to this channel except for Monday, September 29th when the DOW lost 778 points.
That day all three stock market indexes (DOW, S&P 500, NASDAQ) had big losses and closed near their lows for the day on above-average volume. Big media and many elected politicians from both parties said that the drop was due to the public being angry that the $700 billion bailout was defeated in the House. They further warned of an economic depression similar to the 1930's.
Those statements were obvious lies. Consumer confidence increased in September for the second straight month and GDP for the second quarter was 2.8%. Looks like a depression right around the corner, doesn't it? A vast majority of the public was (and continues to be) fervently against the bailout. A flood of angry callers “melted” the phone lines to their congressman and senators, pleading with them to defeat the bailout. A much more reasonable explanation for the big down day's action is that market professionals were rapidly buying up cheap shares. This was confirmed by the rise in stocks the next day.
October is generally the time of year when stocks wake up from their summer doldrums. This year we will probably see similar action as the price of crude oil dropped more than 9% during September thereby amounting to a gigantic tax cut for consumers.
Economic news and market reactions:
Here are September's major economic news items and the stock markets' reactions:
On September 5th, the Labor Department reported the eighth straight monthly loss in national payroll jobs and said that the unemployment rate increased to 6.1% - the highest rate since 2003. But the stock market shrugged gaining 0.7%.
On September 9th, the National Association of Realtors said their index of pending sales of existing homes dropped 3.2% in June. That was 6.8% below July 2007's level. Separately, the Conference board reported research suggesting continuing job woes into 2009. The stock market lost over 3%.
On September 12th, the University of Michigan's preliminary view of consumer sentiment was 73.1 in September – higher than 63 in August. This was the biggest increase since January 2004. Separately, foreclosure filings increased in August but at a slower rate than in previous months. Stocks gained 0.5%.
On September 15th, the Federal Reserve said that industrial output decreased by 1.1% in September following a 0.1% gain in August. But industrial production only decreased by 0.2% after excluding motor vehicles and parts. Separately, the bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch by Bank of America and the financial difficulties of AIG had many concerned about the financial sector. Stocks tumbled 4.5%.
On September 16th, the Federal Reserve kept its target rate for the federal funds rate at 2% and said they were equally worried about impaired economic growth and inflation. Separately, the federal government announced a plan to rescue AIG. Stocks gained 2.1%.
On September 24th, Goldman Sachs announced a $5 billion investment from Warren Buffet in return for 1.6% discounted common shares. Separately, existing home sales fell 2.2% in August but the inventory of unsold homes fell 7% also in August. Shares fell 0.2%.
On September 29th, the House of Representatives defeated a bill worth $700 billion to bailout big financial companies suffering from sub-prime debt. Stocks crashed by 8.5%.
On September 30th, the University of Michigan's final consumer sentiment index was released at 70.3 considerably higher than August's reading of 63. This was ancillary to the reaction of the previous day's drop. Stocks increased by 5.1% confirming professional accumulation in the big sell off.
Futures that affect Stocks
Gasoline and crude oil continued their drop that began July 15th after President Bush got rid of the executive rule preventing off-shore drilling. Crude had entered a sideways trading range during August but lost more than 15% during September and broke the long-term bullish trend line that originated in mid January 2007.
The Bond and Note continued the bullish trend that began in mid June through mid September before retreating. The note broke the bullish trend line; the bond did not. The bond and note powerfully rose on September 29th as investors fled to the safety of government debt after they sold their stock holdings. But, just as powerfully, they dropped the next day as the stock market roared back up.
The U.S. Dollar continued its bullish trend during the first half of September before plunging down for a little more than a week thereby making its first bottom in this new bullish trend. The dollar then went up for the next six straight days to close September at a slight gain. Weekly bullish sentiment remains at a low 12% suggesting more strength for the U.S. Dollar.
Last Issue's Stock Selections: (See "Trading Methodology" on the last page.)
Our profit of 9.2% in September was much higher than our monthly average and much better than the S&P500 which gained only 1%.
Longs:
CMP – not traded
NVS – not traded
PTEN – not traded
Shorts:
RAI – gained 9.2%
Sectors in and out of Favor:
Defensiveness is in as the technology sector is hurt by big losses in “software and services” and inflation is reappearing here as “basic materials” have a big gain in August and September. But the surprise is that financials are one of the top sectors.
|
Sector |
June 2008 |
July 2008 |
August 2008 |
September 2008 |
|
-7.2% |
5.34% |
-1.9% |
1.6% |
|
|
-5.8% |
-10.16% |
18.7% |
7.9% |
|
|
-9.0% |
62.1% |
-5.4% |
-3.0% |
|
|
-6.8% |
6.4% |
-12% |
-9.2% |
|
|
-12.6% |
2.2% |
-0.3% |
0.5% |
|
|
-11.5% |
4.5% |
-2.6% |
-3.2% |
|
|
-14.2% |
7.0% |
2.2% |
-4.4% |
|
|
-2.7% |
-34.1% |
3.5% |
1.2% |
|
|
-12.0% |
7.9% |
-4.9% |
10.3% |
|
|
1.9% |
0.9% |
-5.5% |
2.6% |
|
|
-18.2% |
3.1% |
3.2% |
1.6% |
|
|
-12.3% |
-5.2% |
3.1% |
-2.1% |
|
|
-12.8% |
-28.6% |
29% |
-44.9% |
|
|
1.7% |
-14.0% |
13.4% |
11.3% |
|
|
-15.4% |
9.1% |
1.5% |
1.7% |
|
|
-13.2% |
9.5% |
3% |
6.8% |
|
|
6.2% |
5.9% |
1% |
3.6% |
|
|
-19.4% |
4.6% |
-6% |
10.6% |
|
|
-5.5% |
5.3% |
5.6% |
2.7% |
|
|
-5.7% |
5.2% |
2.4% |
9.7% |
|
|
-4.3% |
4.0% |
-12.9% |
-34.9% |
|
|
-9.3% |
3.6% |
2% |
-7.6% |
|
|
-9.6% |
10.3% |
-1.1% |
-4.1% |
|
|
-21.6% |
-4.6% |
-0.4 |
-1.0% |
|
|
-7.9% |
3.9% |
-1.7% |
-2.4% |
Here are the biggest jumps and drops during the past month in Investor's Business Daily's 197 sector rankings:
Banks - Northeast improved from 92nd to 20th
Banks – Southeast improved from 75th to 17th
Media – Radio and TV improved from 175th to 64th
Food – Dairy Products dropped from 8th to 130th
Energy – Other dropped from 42nd to 153rd
Telecom – Wireless Service dropped from 96th to 168th
Stock Selections:
Our methodology consists of obtaining a basket of stocks that have recently showed days that have had ultra-high volume. This list is refined and culled by means of technical and fundamental analysis. For more information see our free Trading Tutorial available on our front page.
Longs:
Caci International (CAI) – is rated an “A” by Investors.com and is in the computer technical services sector rated 35th of 197 sectors by IBD. CAI rose from mid July to late August before plunging into mid September. But the bottom on September 17th and down thrust the next day were on more than three times average volume strongly suggesting strength. Confirming this, CAI gapped up the next day and has gone sideways since. The seasonal trend is bullish throughout October. Buy on a low-volume down day with lower volume than Monday's with a protective stop under Monday's low.
Greenhill (GHL) – is rated an “A+” by Investors.com and is in the finance – investment brokers sector rated 28th. GHL has been in a bullish trend since early July. On September 22nd there was a down day with more than four times average volume strongly suggesting strength. After that, GHL touched and bounced off the bullish trend line. Tuesday was a low-volume down day having lower volume than Monday's down day. Buy on a strong move past Tuesday's high with a protective stop under Monday's low.
Stifel Financial Corp (SF) – is rated an “A+” by Investors.com and also is in the finance – investment brokers sector rated 28th. SF has been in a bullish trend since March. On September 19th, SF gapped up on about three times average volume suggesting weakness. Confirming the weakness, SF drifted down. But on the fourth day inched down but on about four times average volume, strongly suggesting strength. Buy on a low volume down day. The seasonal trend is bullish through the third week in October.
Shorts:
No shorts this month.
Historical Performance
Here are our performance results since we started this newsletter in May 2003:
Average monthly return: 5.4%
Cumulative return: 285%
Overall Performance / S&P 500: 1,017%
On a monthly basis, we have beaten the S&P 500 48 out of the last 53 times.
Trading Methodology:
For more information about our trading techniques, read the free trading tutorial available on the front page of www.stock-compass.com.
Rates:
Monthly $17
Yearly $200
Contacts:
Phone: (201) 660-8880
Email: jeff@stock-compass.com
These comments are given to serve as guidelines only. Traders and investors are advised to thoroughly research trades prior to investing. No guarantees are made for accuracy. Trading involves risks as well as gains and the reader is solely responsible for any actions taken in the markets. Neither the author or publisher assumes any responsibility whatsoever for the reader's decisions.