What the Market Wants: A Lesson in Listening to Politically Inspired Chatter
Last week, neither Fed Chairmen Bernanke nor European Central Bank (ECB) President Draghi committed their respective organizations to a specific solution to the economic woes of the U.S. or Europe. President Draghi’s firm statement last week that “the ECB is ready to do whatever it takes to preserve the Euro” lacked substance. Yet, that statement sent the S&P 500 roaring up +3.56% over July 26 and 27.
Doubts over the capabilities of either leader to act crept in last Monday as the market was off a very small amount. It got worse on Tuesday, July 31 (-0.43%) as everyone waited for action from the Fed, the ECB or both. Instead, Bernanke spoke in platitudes on Wednesday, August 1, and the market fell another -0.29%. When the ECB merely chatted about gross generalities and no certainties on Thursday, August 2, the markets fell globally with the S&P 500 down nearly -2% by 10:00 A.M., following horrible markets in Asia and Europe. The realization that nothing was really happening caused investors to exit “en masse” sending the market down 20 points.
To make matters worse, the Knight Trading debacle on Wednesday, which cost the company more than $400M, threatened its very survival as its stock price was down 75% by Friday morning. There’s nothing like a rogue trading algorithm to zap investors’ confidence in electronic trading.
Inexplicably, around noon Thursday, retail stores, on the heels of sordid forward guidance from Abercrombie Fitch (ANF) (whose shares fell nearly 15%), announced a surprising +4.3% gain in July. This figure was nearly triple the expected number. Combined with Wednesday’s positive ADP Employment Report of 163K new jobs in July, exceeding the consensus of 125K, the tide seemed to turn. Maybe investors should focus on the reasonable valuations and ignore the Fed and ECB, assuming that they will eventually do what they promised.
Optimism continued to abound Friday on better-than-expected numbers from the monthly employment report (a gain in non-farm payrolls from the private and public sectors of 335K versus an estimated 205K), and the market rolled forward to close at 1390. Unabated by weekend news and political turmoil, the market climbed very, very close to 1400 before profit-taking sent prices down to a close of 1394, up yet another 3 points.
So, from a low on July 25 of 1337, the market was propelled by promises and platitudes to close at 1385 on July 27. The market then fell back to 1357 on failed promises but gained it all back plus an extra 3 points today. Moral of the story: listen to facts and not promises.
Market Stats. The leader in last week’s wild behavior was Large-cap Growth, up +0.34%, while the loser was Small-cap Growth, down -1.38%. Large-cap Growth and Large-cap Value have now led the past week, month, 3-month, 6-month, and year periods. The loser has been Small-cap Growth for most of the past year. Another moral of the story is in turbulent uncertain times, stick with the larger caps. From a sector viewpoint, Technology, Energy, and Consumer Cyclicals seem to offer the best combination of value and growth. Finance certainly has bargain prices but the faint of heart will likely remember JP Morgan ‘s (JPM) Whale trade, Barclay’s dally with LIBOR, and Knight Trading’s wild computer algorithm for quite some time.
Note: This week’s forward-looking SectorCast has put Financials at the top. We want to point out that this is because a lot financial stocks are trading at excellent valuations. However, we do not recommend Financials at this time due to the high risk in the sector.
About 80% of the S&P 500 companies have reported earnings, and about 66% of those companies beat earnings while more than 50% missed revenues. Valuations in general remain quite reasonable, but if revenues continue to slip, it could be cause for concern. Not much in the way of economic data this week. Consumer Credit is tomorrow; Initial Jobless Claims are on Thursday along with the Trade Balance and Wholesale Inventories; and finally, Import and Export Prices Friday along with the Treasury Budget. Must we really hear the Treasury Budget on a late summer Friday?
4 Stock Ideas for this Market
This week, I created a custom search in MyStockFinder, including only large-caps with an emphasis on growth, recent analyst revisions, and insider buying. Here are four you may find interesting:
Cognizant Technology Solutions Corporation (CTSH)—Technology
Western Digital Corp. (WDC) — Technology
NetEase, Inc. (NTES)—Technology
Cummins Inc. (CMI)—Industrials
Until next week,
David Brown
Chief Market Strategist