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Where Did the Sellers Go Today?

Posted on | October 29, 2008 Time: 2:27 am |

I was getting ready to put a title on this post that read “The Least Gratifying 10% Move Ever?”…but at the last minute, after reading all my notes, I looked past my cynicism. Not that there’s anything wrong with being cynical in this market - if I was a financial doctor, I would prescribe cynicism to everyone.

When wave upon wave of bad news arrives from every continent, and when good news is either slapped in the face or ignored, cynicism tends to start sleeping on your couch, like a houseguest that just won’t leave.

But all that said, the major indexes around the world have had a stellar past 24 hours, led by the 10% gains seen in major U.S. averages. While domestic stocks were in positive territory all day, the buying pressure really only accelerated in the last 90 minutes of trading. As you can see the buying was broad based:

And upon closer inspection, the sectors that had been the best relative performers in the past month (healhcare, utilities) lagged during the late-day rally, while the sectors bringing up the one-month performance rear (Basic Materials, Industrials, Energy) did the best. This is what we like to see when markets make a bottom; the business cycle-sensitive names setting the tone.

The Cynic’s Take

The cynic’s argument is still easy to make - after all the S&P 500 is still down 36% YTD, and we’re still down over 22% in the month of October alone. Plus, volume was not anywhere near as strong as we’d like it to be when this large of a move happens. Add in all the other global crisis elements & recession fears, and there’s a case to be made that we may still retest old lows.

The Objective Take

If I can reconcile the lack of heavy volume, everything else about this rally sets up really well. There were big moves upward for some of the metals & other commodities that have been hammered in the past month. Copper was up almost 3%, aluminum over 3.5%, and nickel over 7%.

Grain futures for corn, wheat, and soybeans have quietly formed a bottom over the past week, while coal prices continue to hold up well even as both traded down on Tuesday. These are all areas that need to stop freefalling before industrials and materials can truly be valued on their fundamentals again, something that hasn’t happened for months.

And as to the equity markets, I’m still not sure where S&P earnings stand for 2009 but I know that a trough multiple of 11.5x earnings is pretty low by historical standards. If we slide certain industries and stocks under the microscope, we can find much better deals than the market average.

Maybe the volume was low because the sellers have exhausted most of their fuel…

(From last Friday) “Maybe the “Great Unwind” of leverage has diminished to a Category 1 financial hurricane from a Category 4. And maybe there are enough buyers, bottom-fishers, and auto-buyers out there to fend off a Category 1 storm with buy orders. Volumes today were strong (6B for NYSE, 2.6B for NASD) but not fantastic, so my mental jury is still out on whether we’ve seen the worst of the selling waves.”

Ryan Barnes

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Category: Agriculture, Basic Materials, Fundamental Analysis, Metals, Mining
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