The Starboard Side Report
The week ending 1/30/2009
The manic market continues its one step forward and two steps back sideways shuffle. Amidst all of the doom and gloom,
we still remain constructive on the upside potential of stocks from these levels. As we mentioned last week, it may be a case
of needing more time to bounce along the bottom and build more of a base before heading higher. In our last report, we showed
two powerful bottom formations that ending in the first quarter (1938 & 2003). Today we have included a look at the most
powerful first quarter bottom of all time in 1933. The parallels are quite similar in that we have a new democratic administration
enacting a massive jobs stimulus in the midst of an epic banking crisis. As you can see in the below tab, the market rallied
over 100% in the first four months of FDR's first term. That was from a much lower base, so we won't see another rally
of that magnitude from the whole market. However, it isn't out of the question for certain beaten down stocks and sectors.
We guarantee that the newspaper headlines as that rally bloomed during the depths of the Great Depression were not
very positive either. The final bottom comparison we will make was the only other 50% decline of the 1900's and that was
referred to as the "Bankers' Panic of 1907." We have attached a chart that shows an overlay of that market crash with
the present episode. As you can see they are very similar in more than just name.
In another effort to point out the historical significance of the recent sell-off, please see the attached chart below
that we have titled "US Stocks 10-year Rolling Return." In the commentary and chart you can see that we have
reached a pretty significant inflection point for US equities. On a total return basis, large-capitalization stocks have
just had the worst rolling decade in their entire history. The negative -1.5% return just surpassed the 1938 period that
we mentioned last week. This paints a picture of a deeply depressed market that has the ability to spring back to
life rather quickly.
Over the past few months we have been gradually laying out the case for why we believe a relatively major stock rally is possible.
We have also stressed that by no means will the economic news be good over the next several years. It will take a long time
to fully deleverage and restore confidence to the American consumer. However, time and again throughout history, markets
have produced some pretty impressive countertrend rallies in the face of horrible economic fundamentals and pessimism. We
feel that we are setting-up for one such rally. Some of the bottoming evidence that we have presented in recent reports includes:
- A major capitulation washout on the NYSE Bullish Percent of 4% on October 10th
- Very high investor cash positions earning little interest
- A bottoming pattern similar to other 50% panic decline episodes in 1907,1929,1933,1938,1974 and 2003
- Price-to-earnings valuations near 50-year lows after factoring in the level of interest rates
- Only the second time in 200 years of market history that the 10-year rolling return of large cap stocks has turned negative.
The bottom line is that massive stock panics have historically been followed by big up markets the following year. The only exception
was in 1930-1932 when the US economy contracted by 50% and the market fell 90%. We do not see that as a likely scenario
given the massive amounts of money being thrown at the problem, our large trade deficit and our free floating currency.
Global Market Update
We have expressed our positive views on Asia many times in this report, but the one other region that appears to be in good
shape coming out of this crisis is Latin America. We base this assessment on the strong relative strength characteristics that
this area is exhibiting. This outperformance is most likely the result of the extremely vast natural resources of
countries such as Brazil and Chile.
European Bullish Percent Indexes reversed higher into X's across the board. This may be signaling that the late week sell-off
will not have downside follow through next week because the US often reverses higher within a few days of Europe.
US Sector Snapshot
The Baltic Dry Index is something that we have referenced on occasion in this report. It is a non tradable (hence not subject
to price manipulation) basket of bulk goods shipping prices. It has historically been a very good barometer of the strength of the
global economy and a good proxy for commodity performance. Please see the attached chart for a look at a possible
bottom in this index.
Summary/prices/quotes/statistics contained herein have been obtained from sources believed reliable and are not
The opinions in this report do not constitute, and should not be construed as, recommendations to purchase or
sell referenced securities and should not be the sole basis for an investment decision.
66% rally following the "bankers painc"
The blue line is the Dow from 12-30-07
through the present.
The red line in the Dow between 1906
The President was inaugurated in March back then.
It took about a month for the market to finds its legs
after FDR took office before rocketing 100% higher.
"This graphic representation of nearly the entire history
of the stock market (1810-2008) shows the rolling
10-year average annual total returns for U.S. equities,
with an average of 8.4%. For the 10-year period ended
December 31, 2008 the average annual return reached a
record low of –1.5%. Previously, the lowest 10-year return
for larger-capitalization stocks was –1.3% in 1938.
Looking back at every point when the market returned less
than 2.5% for 10 years, it then returned an average of 13.3%
over the next 10 years, with a range of 7.1% to 18.6%."
The quote above from our research vendor Dorsey Wright
describes the data in the chart to the left. It shows pretty
compelling evidence that the main risk at this point is not
owning equities as opposed to being in cash. This is
especially true if you consider that the Federal Reserve
is trying to inflate away the value of cash.
The good news is that similar levels in the past have
resulted in large stock rallies during the following year.
The bad news is that they also marked the entry into
a much more challenging economic period. In addition,
even though dramatic oversold rallies occurred, the market
remained in a very volatile range for the next 8-10 years.
1938 bottom 1974 bottom
This is a chart of the Baltic Dry Index. This
measures the cost of shipping various raw materials
such as iron ore, grains and coal.
This index signals that Global Economic activity
peaked in the first half of last year.
After a precipitous decline in global trade during
the credit crisis last fall, shipping is finally starting to
shows signs of life for the first time in a while.
Bottom forming in bulk goods shipping rates.
Intermediate-term Technical Indicators Weekly Market Data Short-term Technical Indicators
NYSE OTC Option Avg Sector Global Corporate High Low High Low NYSE OTC
Bull % Bull % Bull % Bull % Bull % Bonds NYSE OTC 10-week 10-week
47.12% 29.95% 42.91% 37.18% 36.67% Buy 6.91% 6.9% 48.02% 43.82%
O's O's O's O's O's in X's O's O's O's O's
Starboard Sector Matrix
0% 50% 100%
Sector Low Risk Sectors Average Risk Sectors
Bullish Percent Between 30-70% High Risk Sectors
Matrix Bullish Percent Between 0-39% Bullish Percent Between 40-69% Bullish Percent Between 70-100%
Soft- 34% Oil- 46%
Inet- 24%Heal- 40% Util- 54%
Higher Return Potential NW Quadrant Food- 40% Prec- 46% Gas- 54%
Positive Relative Buy Zone Chem- 34% Semi- 34% Biot- 40% Mach-44% Osrv- 56%
Strrength Elec- 30% Medi- 32% Aero- 44% Busi- 38%
Fina- 30% Drug- 42% Stel- 46%
Wall-22% Wast- 32% Game- 34% Tran- 42% Real- 48%
Retl- 36% Metl- 48%
Average Return Potential Rest- 40%
Mixed Relative Leis- 26% Tele- 34% Insu- 42%
Strength Prot- 26%
Lower Return Potential Savg- 18% Fore- 28% Buil- 40% SE Quadrant
Negative Relative Bank- 16% Hous- 24% Danger Zone
Strength Text- 20%
Please see "Guide" tab for more details about the sector matrix
This copywritten material has been provided by Dorsey Wright & Associates.
Statistics contained herein have been obtained from sources believed reliable and are not necessarily complete and cannot be guaranteed.
The opinions in this report do not constitute, and should not be construed as, recommendations to purchase or sell referenced securities and should not be the sole basis for an investment decision.
Report Key Sector
Aero Aerospace Airline
Auto Auto & Parts
Busi Business Products
Food Food & Beverage
Fore Forest Prods/Paper
Gas Gas Utilities
Hous Household Goods
Mach Machinery & Tools
Metl Metals Non Ferrous
Osrv Oil Service
Prec Precious Metals
Prot Protection Equipment
Real Real Estate
Savg Savings & Loans
Text Textiles & Apparel
Tran Transports (Non-Air)
Util Electric Utilites
Wall Wall Street
Wast Waste Management
Green letters= Bullish Bull% Chart
Red letters= Bearish Bull% Chart
Global iShares and Closed-end Funds Relative Strength (RS)
Source: Dorsey Wright & Associates
Point RS RS RS RS
& Figure Signal Column Signal Column Total
Symbol Name Signal vs US vs US vs Gold vs Gold Points
APB Asia Pacific Fund Inc Sell Sell O Sell O 0
CEE Central European Equity Fund Sell Sell O Sell O 1
CH Chile Fund Inc Sell Sell X Sell O 1
EEM iShares MSCI Emerging Markets Index Buy Buy X Sell O 3
EWA iShares MSCI Australia Index Fund Sell Buy O Sell O 1
EWC iShares MSCI Canada Index Fund Buy Buy O Sell O 2
EWD iShares MSCI Sweden Index Fund Buy Buy O Sell O 2
EWG iShares MSCI Germany Index Fund Buy Buy X Sell O 3
EWH iShares MSCI Hong Kong Index Fund Sell Buy O Sell O 1
EWI iShares MSCI Italy Index Fund Sell Buy O Sell O 1
EWJ iShares MSCI Japan Index Fund Sell Buy X Sell O 2
EWK iShares MSCI Belgium Index Fund Sell Sell O Sell O 0
EWL iShares MSCI Switzerland Index Fund Sell Buy X Sell O 2
EWM iShares MSCI Malaysia Index Fund Sell Buy X Sell O 2
EWN iShares MSCI Netherlands Index Fund Sell Buy O Sell O 1
EWO iShares MSCI Austria Index Fund Sell Buy O Sell O 1
EWP iShares MSCI Spain Index Fund Sell Buy X Sell O 2
EWQ iShares MSCI France Index Fund Buy Buy O Sell O 2
EWS iShares MSCI Singapore Index Fund Sell Buy O Sell O 1
EWT iShares MSCI Taiwan Index Fund Sell Sell O Sell O 0
EWU iShares MSCI United Kingdom Index Fund Sell Sell O Sell O 0
iShares MSCI Mexico Investable Market Index Fund Buy X Sell O 2
EWY iShares MSCI South Korea Index Fund Buy Buy X Sell O 3
EWZ iShares MSCI Brazil Index Fund Buy Sell X Sell X 3
EZA iShares MSCI South Africa Index Fund Buy Sell X Sell O 2
EZU iShares MSCI EMU Index Fund Sell Buy O Sell O 1
FXI iShares FTSE/Xinhua China 25 Index Sell Buy X Sell O 2
GF New Germany Fund Inc Sell Sell X Sell O 1
IF Indonesia Fund, Inc. Buy Sell X Sell O 2
IFN India Fund Inc Sell Sell O Sell O 0
INP iPath MSCI India Index ETN Sell Sell O Sell O 0
IRL Irish Investment Fund Sell Sell O Sell O 1
IYY iShares Dow Jones U.S. Total Market Idx Buy None O Sell O 1
JFC Jardine Fleming China Region Fund Sell Sell O Sell O 0
KF Korea Fund Inc Buy Buy O Sell O 2
MXF Mexico Fund Inc Buy Buy O Sell O 2
SGF Singapore Fund Inc Sell Buy O Sell O 1
SNF Spain Fund Inc Buy Sell X Sell O 2
SPX S & P 500 Index Buy Sell O Sell O 1
TF Thai Capital Fund Sell Sell X Sell X 2
TKF Turkish Investment Fund Inc Sell Sell O Sell O 0
TTF Thai Fund Inc Buy Sell O Sell X 2
TWN Taiwan Fund Inc Sell Sell O Sell O 0
Bullish Percent= 11.63%
Global Bullish Percent Risk Monitor
84 84 70% and Above= Higher Risk
66 66 Green= Bullish Percent in X's (buyers in control)
64 64 Red= Bullish Percent in O's (sellers in control)
62 China 62
52 South Korea 52
48 London 48
44 US 44
40 Latin America Japan 40
38 Singapore Switzerland Germany 38
34 Europe Asia Australia 34
32 Middle East Global BP 32
30 Canada Indonesia 30
28 Thailand 28
24 Hong Kong India Taiwan 24
22 22 30% and Below= Lower Risk
20 Malaysia 20
Source: Dorsey Wright & Associates
s (buyers in control)
(sellers in control)
Sector Matrix Description
The Starboard Sector Matrix will try and help us identify which of the 40 Dorsey Wright sectors are the most attractive on a risk/reward basis.
The analysis in the matrix combines two concepts
1. Sector Bullish Percent (risk)
2. Relative Strength (potential reward)
Sector Bullish Percent
The Bullish Percent of a sector is simply a compilation of the percentage of stocks in that sector whose charts are on a Point & Figure (P&F) buy signal
Sectors rotate in and out of favor over time. The Sector Bullish Percent charts provide a snapshot of supply/demand and helps measure risk
When the chart is in X's that means demand is in control; When chart is in O's then supply has taken over
It is a useful contrarian indicator used to measure the amount of bullishness and bearishness towards the given sectors
The higher the percentage of stocks in a sector on a P&F buy signal, the greater the risk and vice-versa.
When over 70% of stocks in a sector are on a buy signal it raises the caution flag (especially when supply takes over and chart goes into O's)
When under 30% of stocks in a sector are on a buy signal, it is usually time to start putting a shopping list together
The Sector Bullish Percent risk spectrum is represented in the top row of the matrix from 0 - 100%
Relative strength is a comparative analysis used to measure the performance of one asset to another.
Positive relative strength is correlated with outperformance and like Bullish Percent can be charted using the P&F charting methodology
The relative strength analysis provided by Dorsey Wright compares each sector to the market via four different proprietary indicators
These indicators are then cross referenced to determine the strongest relative performers, thereby providing us with a disciplined methodology for measuring potential reward.
The relative strength potential reward spectrum is represented on the side column from high to low relative strength
Ideally, we are looking for sectors to fall into the NW quadrant because of low bullish percentage (lower risk) and positive or improving relative strength (higher reward potential)