-Joseph Gomez

The week began with all eyes on the 1140-1143 support level in the S&P 500. Last week, I highlighted the fact that the S&P 500 was in a short-term upward channel and that any breaks from the lower trading band could mean more selling was imminent. The index actually crossed below momentarily but by the end of trading on Monday, the market maintained the trend line. Two other data points caught our eyes: the market’s breadth; and investor sentiment. Breadth indicators are strengthening as evidenced by almost half of the S & P 500 are back above their 50-day moving averages. Also, the Institutional Investor and American Association of Individual Investor’s sentiment indicator were both bearish. We view this as a valid contrarian indicator. Overall, we were encouraged by the market’s resilience in the face of such negative headlines coming from various sources and thus began to consider potential moves in our portfolios.

Mainly responsible for the market’s bounce this week were two key issues, Treasury Secretary Geithner and a concerted effort by european leaders to avoid a Lehman-esqe event in Europe. Geithner, who was interviewed at the CNBC Delivering Alpha Conference attended by many of the top hedge fund managers, simply stated that he was assured that European leaders were not going to allow banks to fail. On Wednesday, Greek Prime Minister George Papandreou held a conference call with French President Nicolas Sarkozy and German Chancellor Angela Merkel to reassure the world’s financial markets that every effort would be used to support the European banking sector.

The semiconductor industry got a big lift this week after Broadcom’s (BRCM) offer to buy NetLogic (NETL). We also noticed Texas Instruments (TXN) issued it’s quarterly update in which it lowered some key metrics, yet the stock continued higher despite lowered expectations. Usually, when a stock goes higher on bad news it means sellers are exhausted and a bottom, even short-term, might be in place.
Many investors — especially Dow Theorists — look at the performance of the Transports as a leading equity market indicator. Needless to say then, eyes and ears perk up on a day like Tuesday when the Dow Transports index rose 3.40% while the broader Dow Jones Industrial Average (Dow 30) gained just 0.40% (a difference of 300 basis points).

 

Europe finally caught a bid this week, with Germany’s market gaining the most at 7.4%. Spain was up 6%, Sweden was up 4.8%, Italy was up 3.8%, and France was up 1.9%. European indices still remain deep in the red for the year however.

While bond yields have dropped significantly recently, it certainly hasn’t benefitted the housing market as much as many would have hoped. Earlier this week when the 10-Year was below 2%, the spread between the 10-Year and the average 30-year fixed mortgage rate here in the US was 2.16 percentage points. The 30-year fixed mortgage rate is currently 4.15%. This is extremely low, but the market is demanding even lower.

Fidelity replaced the manager of it’s flagship Magellan Fund after losing 2.2% annually for the last 5 years. It’s been a tough time for many hedge fund managers as well, except they don’t get fired. They simply close the fund and distribute the proceeds to clients and start another fund the following year. That way, they don’t have to deal with the high-water marks. After the close Wednesday, Netflix announced that they were lowering expectations for U.S. subscriber growth. By the end of the week, shares are down 50% off the high of this year.

On Thursday, UBS announced that a rogue trader caused a trading loss of over $2 Billion. It is our opinion that these financial firms are so large that they really lack sufficient internal controls to truly determine what their value-at-risk (VAR) really is.

The G20 finance ministers meet in Washington next week, followed by a meeting of the heads of states in early November in France.

Have a pleasant and productive week.

Key Charts:

 

Key interest rates from Bloomberg.com

Key Rates

CURRENT 1 MO PRIOR 3 MO PRIOR 6 MO PRIOR 1 YR PRIOR
Fed Funds Rate 0.12 0.12 0.11 0.15 0.20
Fed Reserve Target Rate 0.25 0.25 0.25 0.25 0.25
Prime Rate 3.25 3.25 3.25 3.25 3.25
US Unemployment Rate 9.10 9.10 9.10 8.90 9.60
1-Month Libor 0.23 0.21 0.19 0.25 0.26
3-Month Libor 0.35 0.29 0.25 0.31 0.29

Mortgage* (National Average)

provided by Bankrate.com
CURRENT 1 MO PRIOR 3 MO PRIOR 6 MO PRIOR 1 YR PRIOR
30-Year Fixed 4.18 4.25 4.50 4.77 4.50
15-Year Fixed 3.38 3.44 3.66 3.99 3.88
5/1-Year ARM 3.00 3.04 3.04 3.35 3.37
1-Year ARM 2.97 2.98 3.14 3.02 3.65
30-Year Fixed Jumbo 4.75 4.85 4.99 5.35 5.33
15-Year Fixed Jumbo 4.05 4.29 4.36 4.63 4.78
5/1-Year ARM Jumbo 3.19 3.39 3.37 3.74 4.01

 

Best performers for the week:

Worst performers for the week:

Next week’s economic calendar by Econoday.com

Monday Sep 19 Tuesday Sep 20 Wednesday Sep 21 Thursday Sep 22 Friday Sep 23
Housing Starts
[Star]
8:30 AM ET
Redbook
[Bullet
8:55 AM ET
Weekly Bill Settlement52-Week Bill Settlement

Jobless Claims
[Star]
8:30 AM ET
Money Supply
[Bullet
4:30 PM ET