C.M.O. 7.20.2009
Credit Market Overview
July 20, 2009
In a week where the market started out staring, once again, into the abyss it evidently did not like what it saw and ran for cover. Taking with it the bears that that were anticipating, a little too enthusiastically it turns out, the breaking of the neckline of a hoped for fully formed “head and shoulders” technical pattern that had been in the making since May 4th. As the Rolling Stones so ruefully sung: “You can’t always get what you want”.
The speed with which the market distanced itself from the precipice left all but a few in amazement at its levitation. Steve Butler, director of foreign exchange for Scotia Capital in Toronto might have described it best when he said, “The market is very fickle, and I think we’re working with less liquidity than usual because of the summertime markets”.
It all started, it seems, when 67% of the 10% of companies that did report earnings beat analysts’ estimates. That’s a lot better than 10% of 67% but with 90% left it seems like there’s a fair bit of the journey still ahead.
Keeping the “%’s” going just a bit longer, JP Morgan said that only 27% of companies have reported lower revenue compared to the first quarter; 8.9% have told investors to expect better results in the future while 4.9% said “maybe not”.
The VIX added to the circumspect nature of the rise as Wednesday’s 3% move to the upside in the S&P brought the “fear gauge” with it. Exactly opposite of what is supposed to happen. Jason Goepfert of Sentimentrader.com said that July 15th was only the 3rd time in history that both the S&P and the VIX rose more than 2.5% on the same day. The other two being 11/27/2002 and 6/1/2009.
“The market declined after both of those instances. Generally, when implied volatility increases on a day when stocks move strongly higher, it has led to below average returns in the short run and mostly in-line results after a couple of weeks.” Quite frankly with a market that moves with the fits and starts we’ve seen this year my only question for Mr. Goepfert would be what his definition of “in-line” is.
Back on the positive side of things the CBOE put/call ratio closed the week at 0.60 and the OEX at 1.25 which, according to Barron’s, are both bullish levels for the respective indicators.
Counting cards might work well in Vegas, Baby, but on a more mundane level tallying new highs vs. new lows is a tool some market watchers use to gauge the breadth of a move. The NYSE had 99 new highs and 14 new lows or roughly 7:1. The NASDAQ was slightly more subdued with a 1.7:1 ratio and the AMEX was down right boring with 1.35:1.
The market’s skittishness was put into perspective by Anthony Karydakis, adjunct professor at NYU’s Stern School of Business: “The data for a while could be pointing in different directions, but we are forming some sort of bottom and we are only debating what kind of recovery lies ahead”.
Some noteworthies were heard from last week as well with Marvelous Meredith (Whitney) previously a heralded bank bear throwing a log on the bull fire during an appearance on CNBC where she waxed poetic on all things Goldman Sachs. As I noted last week a more careful listening reveals a less than upbeat view of things but we have all watched this market hear what it wants for way to long to concern ourselves with what really matters, now haven’t we?
Nouriel “Da Bear” Roubini was also heard to utter some less than apocalyptic words last week, but not wanting to have any of his 4 gazillion speaking engagements canceled he back peddled a short while later saying “his views hadn’t changed”.
Adding a few horns to the bull’s roster those that see using charts at Brown Brothers Harriman jumped off the fence and into the bull pen last week with their sites set on a number north of 4 digits for the S&P. Their reasoning included the “diminishing number of names trading higher than their 30-day moving average” creating a “slightly oversold” condition. I don’t know for sure but 61.25 S&P points seems like one helluva reaction to “slightly oversold”. Guess that’s why I’m not sitting at BBH!
In our search for knowledge we leave no stone unturned and to the extent that what we call planet earth is not much more than a rock whizzing through space, Arch Crawford, of Crawford Perspectives, was mentioned in a sidebar in Barron’s this weekend. Arch, you see, looks to the heavens to divine the market’s direction and before you go thinking he’s out of orbit you should know that he was at the top of Hulbert Financial Digest’s rankings last year. Mr. Crawford was quoted as saying “the sky energies are becoming fiercely negative” and he is expecting “a quantum move” this coming week; which just so happens to include a total solar eclipse on the 22nd.
So now that we have heard from everyone else what is the CDS market saying? Spreads started last week at 145bps and 982bps on the investment grade and high yield indices respectively. The lows for the week were posted on Wednesday (131bps, 920bps) and they closed the week at 131bps and 928bps. If theory holds this would back up the rise in the stock indexes. On the IG index the 131bps mark was also the low on 7/1/2009 so a break down from that level could prod the bulls. On the high yield index Wednesday’s move broke down through the July 1 low of 941bps so confirmation of the upside would appear to be in place.
As the compilation of source and opinion above proves, nothing in this market is ever for certain and if we can’t get what we want maybe we can get “what we need” and that would be a little clarity, please.
Enjoy the week.
Jim Delaney
