The Tycoon Report

Why Was the Market Up the Last 5 Weeks?

Monday, April 13, 2009 | Barbara Cohen

Have you wondered why the market has been up during the last five weeks?  Did the economic data improve so dramatically to warrant a 20% move up in the Dow?  Is this the start of the next bull market or just five weeks of a bear market rally? 

You want answers to these questions ... and surprisingly, the answers come from the futures market, NOT the stock market.  In this article, I will show you why you need to understand what happens in the futures market to be a successful investor.

First, and to answer some of the questions being asked about trading futures, I put together a matrix of the most commonly traded futures contracts.  Take a look at this matrix.

Commonly Traded Futures

Future Name	Symbol	Payout/Tick	Avg Daily Volume	Margin
Financial Indices
E-Mini S&P 500	ES	$12.50	2.5 million	$500
E-Mini Nasdaq 100	NQ	$5.00	250,000	$500
Mini-Sized Dow	YM	$5.00	150,000	$500
Ice Russell 2000	TF	$10.00	200,000	$500
Nikkei 225	NKD	$25.00	200,000	$1,000
Interest Rates
ECBOT 30-Year Bond	ZB	$15.63	125,000	$1,500
ECBOT 10-Year Note	ZN	$15.63	500,000	$1,000
ECBOT 5-Year T-Note	ZF	$15.63	200,000	$750
Energy
Nymex Light Crude	CL	$10.00	250,000	$1,000
Mini Crude Oil	QM	$12.50	120,000	$500
Foreign Markets
German Dax	FDAX	$12.50	130,000	$4,000
Dow Jones EURO STOXX	FESX	$10.00	1 million	$1,000
EURO Bund	FGBL	$10.00	450,000	$1,000
Currency Futures
Australian Pound	6A	$10.00	40,000	$1,000
British Pound	6B	$6.25	65,000	$1,000
Canadian Dollar	6C	$10.00	35,000	$1,000
CME Euro FX	6E	$12.50	140,000	$1,000
CME Japanese Yen	6J	$12.50	60,000	$1,000
Commodities
Corn	ZC	$50.00	100,000	$1,500
Soybeans	ZS	$50.00	100,000	$2,500
Wheat	ZW	$50.00	50,000	$2,000

"Payout / Tick" is what you can earn for each price increment that goes in your direction.  Unlike stocks that give you 1 penny for each increment, futures give larger amounts, but cost more as well.   Microsoft costs $17/share and gives you 1 penny back every time it goes up by 1 increment.  The ES, for example, costs $500, but gives you $12.50 per increment, or tick.

The "Margin" shows how much money you'll need in your account to trade 1 contract. These are average margins.  Each brokerage is allowed to set its own margin requirements, but they try to stick close to the average.

Take, for example, the E-Mini S&P 500 (ES), where the average is $500.  I've seen brokerage margins set as low as $250/contract and as high as $2,000.  But the average brokerage requires about $500/contract.  If you want to trade 10 contracts, then you'll need $5,000.  You'll actually need more than that because you never want to trade your entire account in one transaction. About $7,500 to $10,000 would be a better account size.

Notice that most of the futures trade between 250,000 to 400,000 contracts daily -- except the S&P 500 E-Mini, which makes the others pale in comparison.  Why?  Because the institutions trade the S&P 500.  

In my last article, I told you that the key to trading futures was volatility (high-low / low-high swings), and that volatility would come from heavy trading.  So, which future do you think would have the greatest volatility, bar none?

The Best Measure of Market Direction

At the start of today's article, I said that it is the futures market that sets the markets' overall direction, not the Dow, and that I would show this to you.  In fact, I will narrow that down ... it is the ES that sets market direction. 

Don't agree?  Let's take a look at what happened this last week.  Let me prove my point.

A week ago on Friday, April 3, 2009, the Dow closed above 8,000.  Remember, this was the day that the unemployment report showed that 663,000 jobs were lost ... and the headlines read, "Dow closes above 8,000," completely ignoring the bad unemployment figures.

Come Monday, April 6, the Dow closed below 8,000, down 41 points.  On Tuesday, April 7, the International Monetary Fund (IMF) announced that toxic assets from banks and insurers would reach $4 trillion, not the $2.2 trillion as originally believed. 

This hit the market like a ton of bricks, and the Dow closed down 186 points, even further away from 8,000.  (Makes you wonder what happened the last four weeks and whether this data was already known by the banking industry).

This brings us to Wednesday, April 8.  At 8 a.m. Eastern, the market was trading down again, with only 160,000 contracts traded overnight.  Remember, this was during pre-market trading (i.e., taking place before 9:30 a.m. Eastern when the market opens). 

The market was headed down for a third-straight day ... and then it started.  Literally thousands of contracts were being traded -- all long.  Huge block trades (i.e., any trade with 80 or more contracts), of 200, 300, even 500 contracts each.  A 500-contract trade is $250,000 on the table.  The market began to soar. 

There was no news event to drive this activity.  By 9:29, just before the market opened, 268,000 contracts had been traded and the market was flying. 

But here's the "oddity."  All those big block trades?  Well, they just stopped magically. That's 108,000 contracts changing hands in just over an hour, pre-market. Normally,  at that time of day, you're lucky to see 25,000 contracts trade hands, and that's only if there is a big news item being released at 8:30. And the market stayed up all day.

Think this is a coincidence? Hmmm. ...

Bad News, But ...

Well finally it's Thursday, the last trading day of the week.  This time we had a whole lot of news coming out.  To begin with, same-store sales.  On the first Thursday of every month, sales of all the major retailers are released between 7:30 a.m. and 8:30 a.m.  They compare the sales from last year at this time to the current sales figures. 

April 2 was actually the first Thursday, but the numbers didn't come out until April 8.  This was the report we were all waiting to see.  Was the consumer participating in the four-week run-up of the stock market?  The answer -- absolutely NOT!

Same-store sales were just awful.  Costco, -5%. Target, -6.3%. Penney's, -7.2%.  Kohl's, -4.3%. Saks Fifth Avenue, -23.6% (even the rich aren't buying).  Dillard's, -19%.  Macy's, -9.2%. Nordstrom, -13.5% (and its CEO got a $1.9 million pay package).  Even Wal-Mart was only up 1% (expected 4%).  Department stores averaged -10.8% and apparel stores averaged -10.5%. 

Bottom line: The consumer was not buying. This was awful news.

At 8:30, the Trade Balance report came out, showing that the trade deficit had narrowed to an eight-year low.  Sounds great.  But look at the report details: The trade balance narrowed because imports had fallen 29%, not because exports had increased. (Exports had fallen 17%.)  Chinese imports fell to a three-year low, with 70,000 factories in China closed.  Japanese imports fell to a 21-year low.   It was clear that consumers were not participating in the economic recovery. 

To top it off, Thursday's unemployment news was released, showing 5.84 million continuing jobless claims, a record high.  Thursday morning brought ugly news.  Something had to be done.  That 8,000 Dow number was a risk!

An Interesting Turn of Events

Wells Fargo Bank reports quarterly earnings on April 22.  The federal government now owns a great deal of Wells.  Companies rarely report earnings early -- RARELY.  Suddenly, Wells Fargo reported in the pre-market that it "expected" to report good earnings on April 22. 

You'll love this.  Almost at the exact same time as Wednesday, starting at about 8 a.m., huge contracts started trading.  The ES went from 127,000 contracts traded to over 260,000, with the market reaching highs for the day,  By the time the market opened at 9:30, the Dow was already above 8,000 and ended up 246 points for the day, at 8,083, all driven by the futures market.  And once again, those big block trades stopped magically. 

Who has the money to trade over 100,000 contracts like that, get a company to report early, and push up the market in face of horrific news? One guess. 

What did they orchestrate?  Easy ... headlines proclaiming a Dow trading above 8,000.  And did they get their wish? To quote a major personality, "You betcha!"

Here are the headlines from MarketWatch.com, one of the major financial news Web sites, for Thursday:


Knowing what was happening in the futures market and the direction being set, what could you have done? 

If you don't trade the futures market, you could still have bought financial stocks during the pre-market.  Every one of those stocks soared. While trading the ES would have given you an even greater profitability with reduced risk/reward, trading the financial stocks could have been rewarding as well.   

The point of the story: If they start trading the market up, go long. 

Upcoming News for the Week of April 13-17

So what's on tap for this week's news?  In the coming days, we'll see some heavy hitters.  We have retail sales on Tuesday.  We already know that the consumer is not participating in the economic recovery from the same-store sales report released last Thursday, so the retail sales report can't be good. 

Along with retail sales, the Producer Price Index and Business Inventories will be released.  Wholesale inventories were released last Thursday and those came in far below expectations, so business inventories won't be a good report either.  That leaves PPI and, on Wednesday, the Consumer Price Index.

If the game is to keep the market trading above 8,000, even if PPI and CPI report horribly, they will prop the market back up so it won't make much difference.

This week, we'll also see building permits and housing starts.  The expectations are so outlandish that any number will make it a good report. Expect Thursday's housing reports to be positive, ending the week up again. 

Additionally, the most important report of all is on the docket.  This report is so important that the data is always two months behind.  Every other report is only one month behind.  If they made this report one month behind, the market would collapse.  That is the Treasury International Capital (TIC) report from the U.S. Treasury -- the net long-term money flowing into the country, or not. 

For the last few months, that report has been scary.  Financial news networks don't talk about the report; it is just slipped in.  Last month, TIC showed no one buying corporate bonds, no one buying equities, and only a small amount of Treasuries being purchased.  You can read the report at http://www.ustreas.gov/tic/

In next week's article, we'll go line-by-line through the TIC report.  There can be no economic recovery until the TIC report shows money flowing back into the United States.

By the way, if you want to know who "they" are -- those who can trade 100,000 contracts, push a market higher, and get a corporation to announce earnings early -- surf up the Plunge Protection Team, or PPT.  Gives a whole new meaning to "your tax dollars at work."  (But don't ever mention that you heard it from me!)





Barbara Cohen
Contributing Editor
The Tycoon Report


Economic Calendar for the Week of April 13 - April 17

TUESDAY, APRIL 14

8:30 a.m. Retail Sales

    * Importance (A-F):  This release merits an A-.
    * Source: The Census Bureau of the Department of Commerce.
    * Release Time: 8:30 Eastern around the 13th of the month (data for one month prior).
    * Raw Data Available At: http://www.census.gov/svsd/www/advtable.html

The retail sales report is a measure of the total receipts of retail stores. The changes in retail sales are widely followed as the most timely indicator of broad consumer spending patterns. Retail sales are often viewed ex-autos, as auto sales can move sharply from month-to-month. It is also important to keep an eye on the gas and food components, where changes in sales are often a result of price changes rather than shifting consumer demand.

Highlights

    * Like the January report, the February retail sales report provided some positive surprises. In particular, total retail sales declined just -0.1% versus a consensus estimate that called for a -0.5% decline. Excluding autos, retail sales increased 0.7% versus an expected decline of -0.1%.
    * The January numbers, meanwhile, were revised higher to show an increase of 1.8% (from 1.0%) in total sales and an increase of 1.6% (from 0.9%), excluding autos.
    * Once again, increases were evident in February across most sectors. Gasoline station sales led the way with a 3.4% jump, which was tied to the 8.0% month-to-month increase in average gas prices. Clothing & clothing accessories followed with a 2.8% jump as bargain hunting continued in the post-holiday period.
    * The areas of weakness won't surprise too many. Motor vehicle and parts dealers led there, with a 4.3% decline in February, followed by food and beverage stores (-0.7%), food service and drinking places (-0.2%), and building materials (-0.2%).

Key Factors

    * With the weakness in December, one can presume seasonal factors continued to play a role in the February data, but all in all, the data are reasonably good.
    * With the upward revision to January, retail sales will be a helpful component in the PCE forecast for Q1 GDP.

Big Picture

    * Retail sales fell off dramatically starting in September.  That was when the financial markets fell apart and the news became apocalyptic.  Auto sales have also collapsed as the news of potential auto company bankruptcies dominated headlines.  Retail sales are likely to remain weak for quite a while given the current trends in employment, and the negative wealth impact for depressed prices for homes and stocks.


8:30 a.m. Producer Price Index

    * Importance (A-F): This release merits a B-.
    * Source: Bureau of Labor Statistics, U.S. Department of Labor.
    * Release Time: Around the 11th of each month at 8:30 Eastern for the prior month.
    * Raw Data Available At: http://stats.bls.gov/news.release/ppi.toc.htm

The Producer Price Index measures prices of goods at the wholesale level. There are three broad subcategories within PPI: crude, intermediate, and finished. The market tracks the finished goods index most closely, as it represents prices for goods that are ready for sale to the end user. Goods prices at the crude and intermediate stages of production often provide an indication of coming (dis)inflationary pressures, but the closer you get to crude goods, the more that these prices track commodity prices which are already available in traded indexes such as the CRB (Commodity Research Bureau).

At all stages of production, the market places more emphasis on the index excluding food and energy, referred to as the core rate. Food and energy prices tend to be quite volatile and obscure trends in the underlying inflation rate.

Highlights

    * The core rate in PPI rose 0.2% for February. This follows gains of 0.2% in December and 0.4% in January. The core rate continues to defy the weak demand, which is undoubtedly pressuring producers as capital equipment prices were up 0.1%. It is likely that the trend in core prices will weaken in the months ahead.
    * The total PPI was up 0.1%. A surprising 1.6% drop in food prices held back the overall gain. Energy prices were up 1.3%, about as expected. Food and energy each account for about 18% of the total index.

Key Factors

    * The overall data reflect few price pressures as the year-over-year increase for PPI is at -1.3%. The core rate is at 4.0% on a year-over-year basis but falling.
    * These data don't present any major surprises and won't alter inflation expectations.

Big Picture

    * PPI trends were highly volatile in 2008, mirroring the trends in global oil prices.  In early 2009, the core rate will rise modestly if at all, while energy prices could stabilize.  That would leave PPI near-flat.  Falling global commodity prices and weak economic demand will keep inflation in check at the producer level.  If global economies remain weak in 2009, as is widely expected, inflation at the producer level will be insignificant. There may even be concerns about global deflation.


WEDNESDAY, APRIL 15

8:30 a.m. Consumer Price Index

    * Importance (A-F): This release merits a B .
    * Source: Bureau of Labor Statistics, U.S. Department of Labor.
    * Release Time: 8:30 Eastern, about the 13th of each month for the prior month.
    * Raw Data Available At: http://stats.bls.gov/news.release/cpi.toc.htm

The Consumer Price Index is a measure of the price level of a fixed market basket of goods and services purchased by consumers. CPI is the most widely cited inflation indicator, and it is used to calculate cost of living adjustments for government programs and it is the basis of COLAs for many private labor agreements as well. It has been criticized for overstating inflation, because it does not adjust for substitution effects and because the fixed basket does not reflect price changes in new technology goods which are often declining in price. Despite these criticisms, it remains the benchmark inflation index.

CPI can be greatly influenced in any given month by a movement in volatile food and energy prices. Therefore, it is important to look at CPI excluding food and energy, commonly called the "core rate" of inflation. Within the core rate, some of the more volatile and closely watched components are apparel, tobacco, airfares, and new cars. In addition to tracking the month/month changes in core CPI, the year/year change in core CPI is seen by most economists as the best measure of the underlying inflation rate.

Highlights

    * February CPI came in a bit higher than expected with a 0.4% increase for the total index (consensus 0.3%) and a 0.2% increase for core CPI, which excludes food and energy (consensus 0.1%).
    * The February data boosted the year-over-year increase in total CPI to 0.2% from 0.0% in the prior month and the increase in core CPI to 1.8% from 1.7%.
    * As expected, the energy index played a key role in pushing up total CPI.  It increased 3.3% in February, led by an 8.3% jump in the gasoline index. The latter index accounted for about two-thirds of the all items increase. The food index, on the other hand, declined -0.1% and helped restrain the overall increase.
    * Housing was unchanged, although the indexes for rent and owners' equivalent rent were each up 0.1% after 0.3% increases in January.
    * The apparel index rose 1.3%, transportation was up 1.9%, medical care increased 0.3%, recreation was up 0.4%, and education and communication increased 0.2%.

Key Factors

    * The higher than expected consumer inflation readings shouldn't be too bothersome given that seven consecutive monthly declines in the crude goods and intermediate goods indexes in the Producer Price Index suggest prices of finished goods for producers should be held in check, thereby limiting the potential pass through effect to consumers.
    * Also, generally weak levels of demand are curtailing pricing power at the consumer level.

Big Picture

    * Inflation is back under control. The commodity-produced inflation scare of this summer is long gone. The idea that higher energy prices will necessarily lead to broad inflation pressures is dead. The concern has actually shifted to deflation, with the idea that businesses will have a hard time mantaining profit margins. Lower energy prices and weak demand are leading to some large monthly declines in CPI. CPI will remain in check well into 2009. The year-over-year increase in CPI stood at 4.9% through September '08, but plunged to 0.0% in January.


9:15 a.m.  Industrial Production and Capacity Utilization

    * Importance (A-F):  This release merits a B-.
    * Source: Federal Reserve.
    * Release Time: 9:15 Eastern around the 15th of the month (data for month prior).
    * Raw Data Available At: http://www.federalreserve.gov/releases/G17/Current/g17.txt.

The index of Industrial Production is a fixed-weight measure of the physical output of the nation's factories, mines and utilities. Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report. One of the bigger wildcards in this report is utility production, which can be quite volatile due to swings in the weather. Severe hot or cold spells can boost production as increased heating/cooling needs drive utility production up.

In addition to production, this monthly report also provides a measure of capacity utilization. Though the rate of capacity utilization is seen as a critical gauge of the slack available in the economy, the market does not completely trust this measure. Capacity is very difficult to measure, and the Fed essentially assumes that growth in capacity in any given year follows a straight line. One can therefore predict the capacity utilization rate quite accurately based on the assumption for production growth. The 85% mark is seen as a key barrier over which inflationary pressures are generated, but given revisions to these data and the difficulties with capacity measurement, the 85% mark should be viewed cautiously. It would be appropriate to look for corroborating inflation indications from commodity prices and vendor deliveries.

Highlights

    * February Industrial Production declined -1.4% (consensus -1.3%), which was a slower rate of decline than the downwardly revised -1.9% rate (from -1.8%) for January. Capacity utilization dipped to 70.9% from 71.9% (consensus 71.0%).
    * Like January, production declines were registered for all major industry groups: manufacturing -0.7%; mining -0.4%; and utilities -7.7%.
    * The report noted that manufacturing output was aided by an increase in the production of motor vehicles and parts after the extended plant shutdowns in January, which added almost a 1/2 percentage point to the change in manufacturing production. A swing to above-average temperatures in February, meanwhile, was the key driver behind the sizable drop in the output of utilities.
    * On a year-over-year basis, industrial production was down 11.2%, although capacity growth was up 1.1%.
    * Manufacturing capacity fell to 67.4% from a revised 67.9% for January and eclipsed the prior month's reading as the lowest since records began in 1948.

Key Factors

    * The good trading news here is that there weren't many surprises. The bad economic news is that the February report continues to reflect a weak demand environment that will drag on GDP.

Big Picture

    * The outlook for industrial production has worsened.  Production held up surprisingly well through most of 2008 due in part to strong exports.  Exports grew at a 7.0% annual rate in 2005, 9.1% in 2006, 8.4% in 2007, and at an annual average rate of 7.8% through the first three quarters of 2008.  A major factor in this boom was a continually weakening dollar.  Now, the dollar has strengthened and global economies are in recession.  This will undermine export growth and take away a major support for US industrial production.  US companies will also be impacted by the darkening US economic outlook.  Production is therefore likely to trend lower.


THURSDAY, APRIL 16

8:30 a.m. Housing Starts and Building Permits

    * Importance (A-F):  This release merits a B-.
    * Source: The Census Bureau of the Department of Commerce
    * Release Time: 8:30 Eastern around the 16th of the month (data for one month prior).
    * Raw Data Available At: http://www.census.gov/const/www/newresconstindex.html

Housing Starts are a measure of the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Building permits are permits taken out in order to allow excavation. An increase in building permits and starts usually occurs a few months after a reduction in mortgage rates. Permits lead starts, but permits are not required in all regions of the country, and the level of permits therefore tends to be less than the level of starts over time.

Highlights

    * The February Housing Starts report produced better-than-expected news, with starts increasing 22.2% from January to an annualized rate of 583K units. That compared to the consensus estimate of 450K, but is still 47.3% below the year-ago level.
    * Permits increased 3.0% to an annualized rate of 547K (consensus 500K), which is still 44.2% below the year-ago level.
    * The primary swing factor for starts was the increase in multi-unit structures. Specifically, starts on dwellings with 5 units or more surged to 212K from 118K in the prior month. Single-family starts, on the other hand, rose just 1.1% to 357K units.
    * By region, total starts were up 88.6% in the Northeast (single family up 54.2%), up 58.5% in the Midwest (single family up 12.8%), up 30.2% in the South (single family 2.5%), and down -24.6% in the West (single family -24.1%).

Key Factors

    * The February report is better-than-feared economic news and could factor favorably in revised forecasts for Q1 GDP. However, it isn't the type of good news that is going to jumpstart the market, which is concerned that a pickup in starts and permits in the face of a glut of inventory of unsold existing homes, and the shadow inventory of foreclosures that haven't hit the market, will get in the way of clearing the excess supply of existing homes that is need to help stabilize prices.

Big Picture

    * The outlook for housing had started to improve in the late summer. Existing and new home sales were stabilizing. Since then, however, the national economic mood has deteriorated (to say the least). Home buying may well go into a deep freeze and housing starts will suffer as a consequence. The outlook for housing now depends a great deal on highly unpredictable political actions and an improvement in the economic national mood. The outlook is certainly not good, but there is still a chance that actions are taken to stabilize the housing industry at current low levels of activity.


10 a.m. Philadelphia Fed Index

    * Importance (A-F): The Philadelphia Fed Index merits a B.
    * Source: The Philadelphia Federal Reserve bank.
    * Release Time: Third Thursday of the month at noon Eastern for the current month.
    * Raw Data and Highlights Available At: http://www.phil.frb.org

In Brief

There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting. The Philly Fed survey asks many questions, but the total index is based on the general question "are business conditions better or worse than last month." It is often the case that a weighted measure of the individual questions on specifics such as new orders and production moves in a different direction than the index based on the general question.


FRIDAY, APRIL 17

9:55 a.m. University of Michigan Consumer Sentiment Index

    * Importance (A-F):  This release merits a B-.
    * Source: The University of Michigan.
    * Release Time: Preliminary: 10 a.m. Eastern on the second Friday of the month (data for current month); Final: 10 a.m. Eastern on the fourth Friday of the month (data for current month).

The Michigan index is almost identical to the Conference Board Consumer Confidence index, though there are two monthly releases, a preliminary and final reading. Like the Conference Board index, it has two subindexes -- expectations and current conditions. The expectations index is a component of the Conference Board's Leading Indicators index.

Big Picture

    * Sentiment readings are a reflection of a variety of events rather than an accurate tool for forecasting consumer spending.  Gas prices and political events can have an outsized impact on sentiment.  In general, these data are of very little economic value.