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OUR
LATEST S&P SECTOR ANALYSIS
AND BUY-SELL SIGNALS
by Bob Bronson
Bronson Capital
Markets Research
March 15, 2005
Portfolio managers are primarily concerned with discerning
risk/reward ratios, so our research is primarily dedicated to discerning
risk-adjusted highs and lows in various capital markets.
Twelve months ago we forecasted the end of the Supercycle Bear Market rally with the S&P 500 making a major top at 1163: http://www.financialsense.com/editorials/bronson/2004/0308.html
Last Monday, March 7, 2005, the SPX made a high at 1229, which was 5.6% higher than that high a year earlier. During the 367 days, the SPX declined as much as 8.5% through its August 13, 2004 drawdown low at 1065.
So while the risk/reward ratio was unfavorable as we had expected, it was only 1.5 to 1 during that 12-month period. Along with the 13% decline in oil inventories during July, August and September, we underestimated the excessive speculation on geo-political supply risks that drove up energy sector prices, with a net bullish influence on stock market prices.
Despite popular opinion to the contrary during the past year, higher energy prices created a bigger positive effect on the SPX as a result of the bullish energy sector than the negative effect they had on the non-energy sectors.
For example, while the SPX made a 5.6% higher high over the 367 days, the 12 non-energy sectors in the S&P 500 index made a lower high, under-performing the SPX by more than 700 basis points. In other words, the capitalization-weighted S&P 500 Index, ex-energy, was more than 2% lower at last Monday's high than it was at the high we called a year earlier.
At some point, the Market Mind fully discounts its dominant influences, which during most of the the past year was energy prices. For example, the everybody-knows negative, or inverse, correlation of energy prices -- crude oil in particular -- with the stock market has been mean-reverting with a high positive correlation over the past five weeks. But longer term, we expect their correlation will eventually settle at near zero.
See the past five-week green area in the two-chart comparison below.
In particular, see the last three days of Feb -- shaded in the three-chart comparison below -- which show the strong intraday positive correlation between crude oil, Exxon and SPX:
Forecasting often involves successive approximations, although most of the time we get it right the first time. Although our initial call for crude oil not to exceed $40 was not profitable on either a short or intermediate term basis, our second call on Oct 25, 2004 of a top at $56, was much more timely: http://www.financialsense.com/editorials/bronson/2004/1026.html
We are still very comfortable with that bearish call over multiple time horizons. We expect both crude oil and the stock market to decline, on an uncoordinated basis, over the immediate short term (weeks) and intermediate term (months), as well as over longer terms of quarters and years, as previously forecasted.
We expect this to result from the negatively diverging, bearish leadership of both the financial (e.g., banks and broker-dealers) and technology (e.g., semi-conductors) sectors, which together comprise 39% of the S&P 500 index.
And we believe they will be joined by the three consumer sectors (cyclical, non-cyclical and services), which together comprise another 22.5% of the S&P 500 index.
See the charts below of the SPX divided by gold, which is a very effective relative strength-weakness timing indicator for the whole stock market, along with historical annotations and its current very bearish implications:
Our eight-factor fundamental and technical forecasting model also suggests that long-term bond yields are peaking -- again -- which in a K-Cycle Winter is bearish for the stock market, as demonstrated by our bond market buy signals since 2000: http://www.financialsense.com/editorials/bronson/2004/0615.html
© 2005 Bob Bronson
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