If you invested all of your money in the stock market, you would be exposed to extraordinary risk of a market retrenchment.
Of course, you could also make a lot of money, especially with how well things are going in the current bullish stock market that continues to somewhat defy gravity.
Yet this is also the time you need to take some extra precaution and think about where you are at and what your end goal is in the stock market.
You don’t want to risk your entire investing capital on the stock market, in spite of any temptation to do so. This is when you have to fight against the greed that might be in you—the greed that’s in most of us—and it won’t be easy.
Remember what happened after each of the multiyear peaks in the stock market over the past decades, when the stocks retrenched. I’m not saying the stock market is at a peak. In fact, the bulls look like they are in full control and heading higher on the chart.
You just need to be on top of things, and don’t let greed ravage your sensibility toward the stock market.
Chasing dreams is one thing, but being prudent is another.
I’m not going to say you should run for the exit, but you need to be aware of where your capital is being invested and understand the associated risk factors.
The reality is that a sound investment strategy means understanding asset allocation and diversification to increase the risk and return of your portfolio.
By asset allocation, I refer to the asset mix of your portfolio … Read More
A year ago, I was able to take a close look at a cool-looking electric-powered sports car. I even got to sit in it. I noticed that it was not made by a manufacturer that I had recognized—it was built by Tesla Motors, Inc. (NASDAQ/TSLA), but I really didn’t give it a second thought.
Well I wish I had now, as Tesla is seeing its shares supercharge on the price chart, up 70% in the first few weeks of May and 167% so far in 2013, based on my stock analysis. Tesla is up a sizzling 198% over the past 52 weeks compared to the S&P 500’s 23% increase.
My stock analysis suggests that the maker of the sharp-looking electric sports car has really shocked the stock market with its superlative price appreciation. Who would have known?
Chart courtesy of www.StockCharts.com
I thought Tesla was interesting and gimmicky in some ways, but never in my wildest imagination did I expect the stock to surge as much as it has.
According to my stock analysis, you can thank the short-sellers for running to the exits and unloading their positions in a classic short squeeze. At the end of April, there were 27.5 million shares of Tesla shorted. The share price was $53.99. Fast-forward 10 sessions, and the price has surged to over $90.00.
Now you can’t blame short-covering for all of the increase in the share price. Tesla did deliver some awesome numbers that tore apart Wall Street’s estimates, according to my stock analysis.
In the first quarter, Tesla sold 4,900 vehicles. That’s it. By comparison, General Motors Company (NYSE/GM) sold … Read More
The Ben Bernanke-driven stock market rally continues in full force and is unabated, but I really question the rate of the advance and believe stocks remain overextended at this juncture.
The S&P 500 made another record high above 1,600 last Friday, but making that move to above the magical level came slowly and cautiously, which makes me feel somewhat uneasy.
The breakout—above the multiyear top near 1,565—is positive, as shown on the chart below, but the move was associated with light volume, which suggests a bearish divergence, based on my technical analysis.
Taking a look at the blue ovals on the stock market chart below, you will notice the possible pullback that has occurred after every six-month rally from November to April over the past three years from 2010 to 2012.
Whether we will see another retrenchment in the stock market this year is unknown, but based on the rate of the gains so far, I feel there is an above-average likelihood of this happening.
Featured below is a stock chart of the S&P 500 Index:
Chart courtesy of www.StockCharts.com
While the stock market continues to show upside potential, I think you should continue to ride the wave upward; however, you also need to be aware of the risk and the reality that the stock market could plummet on bad news, considering how high the gains have been so early in 2013.
Moreover, the Dow Jones Transportation Average is also offering up a red flag on the upward move in the Dow Jones Industrial Average.
The chart below shows that the industrials (as indicated by the green line in the … Read More
The latest data on job creation by the Bureau of Labor Statistics (BLS) are interesting for several reasons. While there are some glimmers of hope, there is still much more work that needs to be done.
For April, job creation improved by 165,000, with the 12-month average now at 169,000 per month. The long-term unemployed level continues to be high, although it is decreasing. Currently, there are 4.4 million long-term unemployed, a decrease of 258,000 during the month of April. This lowered the percentage of long-term unemployed to 37.4% of the overall unemployed, down 2.2% for the month. Another important metric is the participation rate, which remained at 63.3% and is at historically low levels.
Clearly, economic growth needs to accelerate for job creation to continue moving upward. The participation rate remains quite low, and the large number of long-term unemployed is stubbornly high.
The market reacted positively, not only from the headline number, but also the extremely large positive revisions to the previous months of job creation data. While economic growth appears to be slowing, jobs data were much stronger than previously reported, with February and March job creation data revised upward by 64,000 and 50,000, respectively, from the initially reported data.
Do these data indicate any sectors worth investing in?
Yes; as the healthcare industry continues with a steady pace of job creation, with 19,000 newly employed in April, this brings the 12-month average for job creation in the healthcare industry to 24,000 per month. As an investor, with economic growth still relatively anemic nationwide, it appears the healthcare industry will continue on its upward trajectory.
The new … Read More
Pop the champagne; it’s time to rejoice and toast this month’s jobs numbers, isn’t it? The S&P 500 edged up to another record high above 1,600, while the Dow is seriously eyeing 15,000.
I did think those targets for the two indices were achievable, but not this early in the year.
You can thank the Federal Reserve and the astounding job creation for the high jobs numbers—of course, I’m being sarcastic to a degree.
According to the United States Department of Labor, job creation tallied 165,000 jobs in April, better than the Briefing.com estimate of 135,000. The March reading was also revised upward to 138,000 new jobs from the previous muted reading of 88,000. The 165,000 new jobs is decent, but let’s be realistic: that number is no reason for the S&P 500 to be trading at a record high. The truth of the matter is that we need to see a higher job creation number.
The unemployment rate fell to a four-year low of 7.5%, much better than the Briefing.com estimate of 7.7%. Again, great, but I think the drop has more to do with job seekers leaving the search.
Yes, the job creation numbers are a myth as far as the real strength of the labor market.
The Labor Department estimates there are 11.7 million people unemployed, but in reality, it is probably twice that because many workers have quit looking for work out of frustration.
In fact, a closer examination of the job creation numbers from the Labor Department tells us another story—not what is in the headlines and not what the government wants you to know…. Read More
As the S&P 500 enters the month of May, many people are worried about their investment strategy, especially in light of the old saying “sell in May and go away.” Does this saying hold any value?
Let’s look at the question from two angles: a historical context and the S&P 500’s currently position.
There are some historical facts that raise a few concerns in my mind regarding an investment strategy in the market during the month of May and early summer—not only in terms of actually selling off, but also in terms of increasing volatility.
A look at the best and worst performances for the month of May since 1928 by Bespoke Investment Group, LLC shows that for the S&P 500, two of the top-10 worst Mays (May 2010 with a 8.2% contraction, and 2012 contracting by 6.27%) and one of the top-10 best Mays (May 2009 with 5.31% growth) occurred during the recent bull market that started in 2009. (Source: “S&P 500’s Best and Worst Months of May Since 1928,” Bespoke Investment Group, LLC web site, April 30, 2013, last accessed May 1, 2013.)
Clearly, volatility in the S&P 500 has increased substantially for the month of May for the past few years over the course of the current bull market, and your investment strategy certainly needs to take that volatility’s timing into account. Additionally, since the bull market’s beginning in 2009, the S&P 500 during the month of May has averaged a decline of 2.64%.
Looking even further back, many investors have continued to alter their investment strategy for the S&P 500 during the month of May—and the … Read More
One of the common questions I get asked is: where are the long-term opportunities for growth? We all know that the American economy is growing extremely slowly, yet most people don’t realize how international many of the S&P 500 companies really are.
As an example, while we all think of Kentucky Fried Chicken (KFC) and Pizza Hut as American restaurants, the parent company, YUM! Brands, Inc. (NYSE/YUM), has a growth plan that is not based domestically and is instead focused on the Chinese economy.
Because S&P 500 companies are increasingly focusing on growth potential around the world, the one economy that has seen consistent increases in gross domestic product (GDP) has been the Chinese economy.
However, recent data are showing signs that the Chinese economy might be slowing down. According to the National Bureau of Statistics, industrial profits in March increased by 5.3% year-over-year, but it marks a drop from the 17.2% increase in industrial profits recorded during January and February. (Source: Orlik, T., et al., “Chinese Industrial Profit Growth Slows,” Wall Street Journal, April 28, 2013.)
Earlier this year, we received information that the Chinese economy did post a lower-than-expected GDP increase of 7.7%, down from 7.9% during the fourth quarter of 2012. The leadership in China is trying to engineer a slower Chinese economy to prevent bubbles.
So, what does this mean for S&P 500 companies?
Many S&P 500 stocks are looking toward the Chinese economy as the next great growth generator. YUM! Brands opened almost 2,000 restaurants in 2012, of which 889 were based in China. (Source: “YUM! Staying the Course: China and a Whole Lot More, … Read More
When I read the newswires each morning, I scour for trading opportunities; but the one thing that I have been noticing lately is the lack of moderate revenue growth among the reporting companies. I’m not saying that I would like to see revenues growing at 30%–40% or more, but even growth in the low double digits would suffice at this point, given the global stalling.
The market is all giddy about the first-quarter earnings season early on, but I really don’t understand why investors are that happy. I’m clearly not seeing the same things.
As of Monday, about 104 S&P 500 companies have reported during the earnings season, and their results have been in line with the previous quarters, in which about 67.3% beat earnings-per-share (EPS) estimates, according to Thomson Financial.
Again, the first-quarter earnings are encouraging—but not exactly something to get euphoric about.
The reality is that while two-thirds of the S&P 500 companies are beating estimates during the earnings season, the revenues side is another story—a story that I feel is being ignored by investors.
Companies are beating the earnings estimates assigned by Wall Street. In some cases, the earnings estimates are lower than previous estimates; in this regard, the companies are, in some cases, actually only meeting or beating reduced estimates during this earnings season.
Moreover, we are also seeing legitimate earnings manipulation by companies that want to please Wall Street and investors. This is not illegal and can often return business intelligence (BI) for shareholders.
By pursuing aggressive cost cutting and containment, companies can reduce the cost side and present a much better earnings picture, even … Read More
With capital shifting into the perceived safety of blue chips and large-cap stocks, small-caps and technology stocks have been declining on the charts.
Given the advance so far this year in the equities market, it’s understandable to expect some hesitancy.
The Dow is up 13.4% as of April 12, and it’s on pace for a gain of 47% on an annualized basis.
I doubt this will happen and expect market adjustments in the equities market along the way. The same goes for the S&P 500 and the other key market indices.
Small-caps in the equities market have also fallen off since the end of the first quarter.
At the back of the pack is the technology sector; but there has been a lack of strong leadership from any sector, including the semiconductor, Internet, and technology sectors, in general.
The following chart shows the recent movement of the three sectors (semiconductor, Internet, and technology) since March and their sideways direction.
Chart courtesy of www.StockCharts.com
Without any leadership in the equities market, the NASDAQ and technology stocks will continue to drift. However, there are some opportunities for speculators searching for contrarian situations.
The Internet sector is flat and lacking a clear direction.
In the stock chart below, the First Trust Dow Jones Internet Index (NYSEArca/FDN) fund shows the sideways channel that has been in place since late January.
Extrapolating on this data, I don’t see any strong and clear signs of a breakout at the top channel line, but if you think longer-term, there are opportunities in the equities market.
Chart courtesy of www.StockCharts.com
The “Best of Breed” in the Internet sector … Read More
I think maybe it’s time to start putting your money in the piggy bank to avoid any major investor mistakes.
With the Dow and the S&P 500 at record highs, I’m trying to find reasons to want to buy in this market. However, I’m finding it difficult to even want to buy, as I still feel a stock market correction is on the way.
I’m sorry, but I can’t tell you when this will happen or by how much. All I know is that you need to be careful to avoid possible investor mistakes.
We have the first-quarter earnings season that started on Monday, and if you believe the early estimates, there will not be many happy traders and investors out there.
FactSet estimates earnings will contract by 0.7% in the first quarter, followed by an overly optimistic second half, predicting an explosive earnings rally of 10.1% and 15.6% for the third and fourth quarters, respectively. I’m not sure why FactSet is this giddy, but in my view, for these growth metrics to emerge, all of the stars will have to align.
I’m still not convinced corporate America is set for another growth spurt. The Federal Reserve knows this. Based on the recent non-farm payrolls reading showing a dismal 88,000 new jobs, I just can’t comprehend how the country is set to achieve revenue growth.
I may sound like a downer, but I consider myself more of a realist who wants to avoid investor mistakes.
And Main Street has also appeared to have forgotten the debt, while the government and Congress are still battling it out to come up with … Read More
Last week, the new governor for the Bank of Japan (BOJ), Haruhiko Kuroda, announced a game changer for that nation’s quantitative easing policies. The BOJ now plans to initiate monthly bond purchases in the amount of 7.5 trillion yen (US$77.8 billion) per month in an attempt to increase inflation to two percent within the next two years.
When it comes to creating an investment strategy based on this quantitative easing policy, there are two initial takeaways. The first is that this will put pressure on the Japanese yen to weaken its value; the second is that stocks will rise within that nation, since many firms are exporters and will benefit from this quantitative easing plan.
This investment strategy has already begun, as large institutional investors have started front-running this announcement, starting with the election of the new Prime Minister of Japan last fall. However, the country is just about to embark on this new aggressive quantitative easing plan that will last approximately two years—if not longer. There is still plenty of time to profit from an investment strategy using this quantitative easing announcement as a catalyst.
The Japanese yen has already weakened, but it’s poised for additional decline with such an aggressive quantitative easing policy. One investment strategy is to consider the possibility of shorting the yen. Recently, George Soros and Bill Gross stated that this quantitative easing policy could significantly push the yen down further than most people believe.
Soros commented, “If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then … Read More
It’s almost that time again, corporate earnings season. Starting next week, American firms begin reporting their corporate earnings for the first quarter of 2013. Considering how high the S&P 500 is, many analysts and investors will be closely watching the results.
According to estimates from Bloomberg, earnings for the S&P 500 firms are expected to drop by 1.9% for the first quarter. This represents the first decrease in corporate earnings since 2009. (Source: Rupp, L. and Gammeltoft, N., “U.S. Stocks Fall as Energy, Financials Tumble on Economy,” Bloomberg, April 3, 2013.)
We’ve seen a decrease in estimates for earnings just over the last couple of months. In January, according to Bloomberg, the average corporate earnings estimate by analysts for S&P 500 companies was a growth of 1.2% for the first quarter. This follows the fourth quarter of 2012, in which corporate earnings for these companies grew by eight percent.
According to FactSet Research Systems Inc., so far for the first quarter 2013, 86 S&P 500 firms have issued negative earnings guidance, while 24 have issued positive guidance. (Source: “Earnings Insight,” FactSet Research System, Inc. web site, March 28, 2013.)
With one-year forward earnings estimates at $114.08 for the S&P 500, this makes the forward price-to-earnings (P/E) ratio 13.7. This certainly doesn’t make the market expensive, but it’s not cheap either. To put this in context, historically, the trailing P/E ratio is usually in the range of 10 to 25, with certain periods both below and far above this range.
One sector to watch out for is technology, which according to FactSet is predicted to have corporate earnings drop by 3.7% … Read More
The impact of the Federal Reserve’s low interest rates and easy monetary policy can be seen everywhere. The housing sector is seeing another boom thanks to the Federal Reserve. So is the retail sector and consumer spending, in spite of the fact that jobs growth is not at pre-recession levels. The Dow and the S&P 500 also achieved more records on Tuesday. Again, the stock market wealth and all of the 300,000 or so newly minted millionaires have the Federal Reserve to thank.
On Tuesday, the automobile sector joined in on the fun, as easy money and cheap financing rates for new vehicles helped to drive up sales to the highest levels since 2007.
At Ford Motor Company (NYSE/F), sales increased six percent to 236,160 vehicles sold in March, while at General Motors Company (NYSE/GM), sales jumped 6.4% to 245,950 in March.
You can get a 60-month financing term for a new vehicle for as little as 2.24% at the Bank of America Corporation (NYSE/BAC) and 2.69% at Capital One Financial Corporation (NYSE/COF). (Source: “Auto Loan Rates,” My Bank Tracker web site, last accessed April 2, 2013.) The average 60-month rate is around 4.12%, according to Bankrate.com, down from 4.52% a year ago.
You can also thank President Obama for helping to save the auto sector, as the move is apparently paying dividends.
While the renewed spending across America is good for the economic recovery, you kind of have to wonder about the ramifications down the road, when interest rates begin to ratchet higher.
Some members of the Federal Reserve are already beginning to voice their opinion to start reducing … Read More
The S&P 500 continues to remain at extremely elevated levels, with many professional and retail investors looking for a market sell-off. What is surprising is that the S&P 500 has risen in spite of general market sentiment that hasn’t become overly bullish.
New data from Bloomberg show that the S&P 500 has moved up towards analysts’ estimates to such a level that the market is approximately five percent away from the mean forecast. This is the closest the S&P 500 has gotten to Wall Street estimates in the last seven years, with the historical difference normally around 14%. (Source: Rupp, L. and Gammeltoft, N., “U.S. stocks fall as American manufacturing index slips,” Bloomberg, April 1, 2013.)
What this means is that the S&P 500 has exceeded the current market sentiment and has continued to rise. At this point, either the S&P 500 has gotten far ahead of the underlying fundamentals, or market sentiment will turn even more bullish, as analysts begin to increase their expectations for this year.
Not only are the pros lagging the market, most retail investors are also underinvested in the market. While there has been a definite shift from cash and money market funds to the S&P 500, the vast majority of investors have not enjoyed the S&P 500’s massive upward move.
Two things will occur: either retail investors will look to buy into the S&P 500 on a correction, or the future pullback will indicate a far greater sell-off, as market sentiment shifts into negative territory.
Fundamentally, recent data continue to show conflicting evidence for the U.S. economy. The Institute for Supply Management’s factory index … Read More
It’s that time again. On Monday, aluminum maker Alcoa Inc. (NYSE/AA) will once again grace us with its presence, as the bellwether gets set to tell how the global economy is feeling when it gets the first-quarter earnings season going. The company has long been a staple for the earnings season, as aluminum is used in numerous industrial applications globally and represents a decent barometer on the condition of the global economy. From automobiles to aircraft, packaging to building, and construction to consumer electronics, a strong report from Alcoa this earnings season will keep the current rally going.
Yet a few weeks ago, there were some early warning signs. Bellwether shipping company FedEx Corporation (NYSE/FDX) and farm equipment seller Caterpillar Inc. (NYSE/CAT), both considered to be barometers of the global economy, suggested some global stalling.
The first-quarter earnings season is expected to see earnings fall 0.7%, but growth is estimated to return to 10.3% in the third-quarter earnings season and 15.6% for the fourth-quarter earnings season; clearly there are some optimistic estimates, according to FactSet. (Source: “Earnings Insight,” FactSet Research Systems Inc. web site, March 22, 2013, last accessed April 2, 2013.) The contraction in the first-quarter earnings season is not a big deal, but the optimistic growth expectations going forward appear to be somewhat too optimistic and could result in a market letdown.
According to FactSet, about 84 S&P 500 companies have warned of lower-than-expected earnings, versus 24 companies that provided positive guidance.
The sectors issuing the worst forecasts include materials, health care, and consumer staples, so you may want to stay away from these sectors.
The top-performing earnings … Read More
The party hats came flying out on Wall Street last Thursday after the S&P 500 broke above its record close of 1,565.58, following numerous failed attempts.
But hold on to those party hats. Now the real fun begins, as we’ll see if the broader market can continue to move higher after this break, or if a near-term top has been reached.
What I saw was a break that really amounted to very little and had little conviction. The move to the promise-land occurred after a move of less than three points. Again, not a big deal! The trading volume on the New York Stock Exchange (NYSE) was 650 million shares, and only 55% of the companies on the NYSE moved higher. About 41% of the issues moved lower.
These are not the great metrics you expect from an earth-shattering event, but then again, the move by the S&P 500 above its record close was, well, a bore, in my view. Keep in mind that the all-time intraday record high for the S&P 500 is 1,576.09, reached on October 11, 2009.
If the S&P 500 can break to 1,600, I would be more impressed; but then I really doubt that will happen in the near term unless, of course, we see an explosive non-farm payroll reading on Friday.
Chart courtesy of www.StockCharts.com
I’m not trying to be a party-pooper, but trust me when I say I have seen more eventful market moves in my more than 20 years of trading.
I actually may get off my chair and jump for the stars if the NASDAQ can achieve its record high of … Read More
As the S&P 500 continues marching higher, all eyes will be on corporate earnings for the next quarter and the rest of the fiscal year. While much of the move in the S&P 500 can be related to the Federal Reserve’s easy monetary stance, ultimately, corporate earnings need to rise to justify current price levels.
One company that is quite involved in not only the American economy but also the global economy is FedEx Corporation (NYSE/FDX). The latest corporate earnings report by FedEx indicates that perhaps the underlying economy is not as strong as many people believe.
FedEx reported a 31% decrease in corporate earnings for the third quarter. It is interesting to note that international export volume did increase during the quarter by four percent; however, a large number of shippers moved away from priority services to cheaper options. (Source: Morris, B. and Sechler, B., “FedEx Customers Like Slower and Cheaper,” Wall Street Journal, March 20, 2013.)
While revenues did increase, the hit to corporate earnings is an indication that other companies don’t see a large amount of end-user demand building up. The reason I say this is because if you were a business and had a large number of clients, you would be willing to pay for priority shipping to ensure the sale. However, with a growing number of businesses choosing the cheaper options, this tells me that demand is not as strong as many believe.
FedEx is a company that deals with many of the S&P 500 firms, and this could be an early sign that corporate earnings might be weaker than expected for the next quarter…. Read More
The market appears to have another bull leg, with the Dow closing higher in 10 straight sessions, setting multiple record-highs in the process.
With the advance, there are now questions regarding the sustainability with arguments on both sides. Even former Federal Reserve Chairman Alan Greenspan went on CNBC and suggested the stock market did not show “irrational exuberance,” saying stocks were cheap. (Source: Belvedere, M.J., “Greenspan: No ‘Irrational Exuberance’ in Stocks Now,” CNBC, March 15, 2013.) There have been others also supporting the bull case, yet some pundits have also come out and suggested the market is set for a downfall.
While I’m encouraged by the recent rally to multiyear highs, I believe the rapid pace of the advance is not sustainable and stocks are priming for a setback, but I’m not sure when or by how much. I do believe 2013 will be positive for stocks, but at this time, you also need to be aware of the risk and vulnerability on the charts, especially with the S&P 500.
So while the global economy is improving, the catalyst for the upward move in stocks has largely been the easy monetary policy worldwide that has resulted in a low interest rate environment and the search for alternative investments to low-yielding bonds. Without the easy money, I highly doubt stocks could have risen at such a rapid pace.
At this time, you need to think about a viable investment strategy in case stocks falter.
One investment strategy would be to take some profits off the table, but then you may miss out on a potential stock market rally.
You can buy … Read More
When it comes to long-term investing, one factor that needs to be considered is that the dividend yield can provide a large portion of the total return. While everyone likes to pick the highflier that will move up a tremendous amount, the truth is that having a portfolio of stocks that continually increase their dividend yield can help increase total returns of a portfolio.
It is expected that for 2013, S&P 500 companies will pay out at least $300 billion in dividends. This is an even higher amount than the $282 billion paid in dividends for 2012. (Source: Demos, T., Russolillo, S., and Jarzemsky, M., “Firms send record cash back to investors,” Wall Street Journal, March 7, 2013.)
Long-term investing that incorporates companies issuing a stable and increasing dividend yield over time can help mitigate the gyrations of the market.
Not only are corporations flush with cash and looking to pay an attractive dividend yield as compared to U.S. Treasuries, but companies are also buying back record levels of shares.
According to Birinyi Associates Inc., in February, corporations announced a total of $117.8 billion in share buybacks, the highest monthly total since 1985.
Generally speaking, both share buybacks and issuing a dividend yield are positive for long-term investing. However, I do worry that companies are buying back shares at levels that are elevated.
I think it would be far more beneficial for long-term investing if corporations had a flexible approach regarding paying back cash. Meaning, when the stock price declines, corporations should then accelerate share buybacks, and when their share prices are up significantly, corporations should increase their dividend yields…. Read More
One of the more common economic topics to be discussed recently has been the possibility of a global economic recovery. The lack of job creation is not only a problem for America, but it’s also a problem globally. The economic recovery has been extremely slow for many parts of the world, leading to an international void in job creation.
Recent data have offered contradictory information regarding the possibility of a global economic recovery. But what worries me is that after so many years following the Great Recession and after trillions of dollars in monetary stimulus, the world still cannot achieve an economic recovery, and millions remain unemployed due to a lack of job creation.
Recent data from France show that industrial production fell far more in January than was expected. Expectations for France’s industrial production in January estimated a 0.2% drop; yet it came in at -1.2% from December, according to Insee, France’s national statistics office. (Source: Deen, M. and Riecher, S., “French industrial output tumbles as recession looms,” Bloomberg Businessweek, March 11, 2013.)
For the three months ended January 31, 2012, factory output fell by 4.6% in France. This is a serious decline, and it clearly shows a lack of economic growth. Job creation is nowhere in sight, as unemployment in France was 10.6% in the fourth quarter—a 13-year high.
Why does this matter for Americans?
Of course, America is not France; however, recent policy decisions here worry me tremendously. In fact, it’s the lack of policy decisions that worry me. Washington is quick to raise taxes, as were the French, yet they can’t make structural reforms that can … Read More
The Dow Jones Industrial Average is firing on all cylinders, trading at a record high. The S&P 500 is also close to its all-time record. Technology and small-cap stocks are blazing along. The amount of new stock market wealth created in the first week of March and in 2013 has been great. Add in the better-than-expected jobs numbers and a decline in the unemployment rate to 7.7%, and you would think that the U.S. economy is back, loaded and ready to go. But we may be closer to a financial crisis than most think.
Here’s the problem: the creation of stock market wealth is heavily weighted with the institutional money and the top one to five percent of the wealthiest Americans. (I use the wider range of the top earners, since you have to be doing fairly well to be in this group.)
There’s an old saying—“Money makes money.” But let me put it another way: making money on $1.0 million is a lot easier than making money on $1,000. Earn two percent on $1.0 million, and you’d have an extra $20,000. Make two percent on $1,000, and you only have $20.00, just enough for a dinner for two at McDonald’s Corporation (NYSE/MCD). All I’m saying is don’t be fooled by the new headlines talking about how well America is doing, as a financial crisis is still possible.
The housing market is booming, but we all know that the rally in prices is partially due to rich investors and institutions buying cheap properties from those who had to sell or be foreclosed on due to a lack of funds to … Read More
The equities market continues to hover near its multi-year highs. There are still many Wall Street analysts who suggest that the bulls are in full control and will drive stocks higher.
Investor sentiment had been extremely bullish in each session since the start of the year, but a neutral rating was reported on February 21–22.
We are still seeing optimism on Wall Street from the bulls, with some market watchers calling for the Dow to crack 15,000, and move upward toward 20,000. Even the small-cap Russell 2000, which recently traded at a record high, is up nearly 10% this year. Based on an annualized rate, the Russell 2000 would advance over 60% this year, considering what has happened so far. I actually think some of the euphoria in the equities market is overblown.
While Wall Street and the media may still feel the equities market will continue to move higher, I believe there’s some real risk in the equities market that you should be aware of as shown in the chart below.
Chart courtesy of www.StockCharts.com
While I’m not calling for a stock market correction, I do see red flags out there that suggest some selling pressure may be on the horizon for the equities market.
Take a look at the Dow. The blue-chip index has failed on two occasions to hold above 14,000, so there appears to be some topping action, based on my technical analysis. The reality is that selling in blue chips would be a red flag in the equities market.
In the broader market, while the S&P 500 initially held at 1,500, the index did see … Read More
The major bank stocks all closed off 2012 near their respective 52-week highs; and they’ve started 2013 with a bang. Driven by an improving banking industry that is assuming less risky businesses while shoring up their balance sheets and producing stronger units, the KBW Bank Index is up eight percent, outperforming both the S&P 500 and the Dow Jones.
The subprime credit crisis that surfaced in 2008 and drove the U.S. and the global economy into a recession was not what we wanted to see; but in some sort of twisted way, the events have led to an industry that has restructured the way banks do business—more specifically, the amount of risk that is assumed by a bank via sophisticated strategies. So far, this shift in structure, coined the “Volcker Rule” because it was set in place by economist and ex-Federal Reserve Chairman Paul Volcker, appears to be capping the number of speculative trades made by the banks, which is good.
Banks have altered the way they do business, and they’ve shown positive strides along the way.
In my view, the operating results have been fairly good, and this indicates that the banks will be able to grow their business volume across the board during the U.S. economic recovery.
Moreover, with the housing market and the U.S. economy continuing to improve, I feel bank stocks will also see some gains.
Most of the big banks have paid back part or all of their government loans. Overall, bank stocks are showing promise and delivering better results.
While risk surrounding the bank stocks has declined, there are still issues that could hamper … Read More
Over the past few months, the strong performance by the broader market, best represented by the S&P 500, has been far better than most analysts and investors had expected.
Considering the political situation in America, especially with the fiscal cliff talks, and the questions surrounding earnings, the S&P 500 has risen to levels not seen in years.
However, there are some indications that perhaps a market correction in the S&P 500 is likely. One indicator is to use insider selling information to gauge how corporate executives view their companies.
For the week ended February 1, 2013, the Vickers Weekly Insider Report, produced by Argus Research, reported that the insider sales ratio was nine to one for stocks on the New York Stock Exchange (NYSE). This means that for every one share bought by insiders, they sold nine shares. (Source: Hulbert, M., “Insiders now aggressively bearish,” MarketWatch, February 6, 2013.)
This is an extremely high level of insider selling. The last time the ratio was this high was in the summer of 2011, just prior to a market correction in the S&P 500.
Note that this does not guarantee that a market correction in the S&P 500 will occur. There have been many times in the past when insider-selling pressure was high and the market continued moving higher. However, based on information gathered by Argus Research, when the insider selling ratio gets to this point, the Wilshire 5000 index experiences a market correction of 2.1% over the next month.
While many analysts had expected a disappointing earnings season to cause a market correction in the S&P 500, so far, companies have … Read More
It’s amazing how resilient the equities market has been in spite of the concerns regarding the budgetary cuts and debt ceiling, the eurozone’s economic stalling and debt, and the earnings risk.
The current equities market has some bull legs and could advance higher, driven by more encouraging earnings and economic news; but we are also at a crux, with the S&P 500 at 1,500 and the Dow recently breaking to 14,000. The reality is that the advance we saw in January is not sustainable at the same pace, based on my technical analysis. Just think back to last year. After an equally strong start and January, stocks began tapering off in February after the first quarter.
On the one hand, I can see this market moving higher to new multi-year highs; but on the other hand, I feel that there’s chart risk, as evidenced by the potential third top on the S&P 500, which I recently discussed in this newsletter. The early success of the earnings season is already discounted into the market. The nice economic recovery in the U.S. is also discounted. We need more positive readings out of the financially challenged eurozone, as well as China.
So while the bias remains positive, the biggest investor mistakes may be to get too comfortable and let down your guard.
Just take a look at the CBOE Volatility Index (VIX) based on the S&P 500, which is known as the “fear factor.” The VIX reading on February 6 was 14, which is well below some of the high readings since 2004, as shown on the chart below. The low VIX reading … Read More
The auto sector has been on a nice upward rally since trading at a bottom in July 2012, according to my stock analysis. Driven by low financing rates and rising domestic and foreign sales, we are seeing more carmakers taking the plunge and updating their older clunkers.
In January, auto sales were sizzling, with General Motors Company (NYSE/GM) and Ford Motor Company (NYSE/F) recording sales growth of 16% and 22%, respectively. Toyota Motor Corporation (NYSE/TM) also rallied, reporting sales growth of 27% year-over-year in January. (Source: Seetharaman, D. and Klayman, Ben, “GM, Ford post stronger-than-expected auto sales for January,” Fox Business, February 1, 2013.)
The numbers are estimated to be even better this year, so it would be an opportune time to accumulate some auto and auto-based stocks, based on my stock analysis. GM estimates that there will be between 15 million and 15.5 million autos sold this year. (Source: Ibid.)
Take a look at the stock chart for the S&P 500 Automobiles & Components Industry Group Index below. Notice the bullish ascending triangle followed by the breakout at the horizontal blue resistance line. But there is risk, as the index is currently facing support at the present level on weakening relative strength and a bearish moving average convergence/divergence, according to my technical analysis. Watch to see if the support level holds.
Chart courtesy of www.StockCharts.com
My stock analysis indicates that the auto sector has gone through major structural changes over the past few years since the bankruptcy of General Motors (GM) in June 2009. In the nearly four years since, my stock analysis shows that the auto sector has … Read More
One of the stock market’s most perplexing moves for both professional and retail investors is when the market, best represented by the S&P 500, moves in a direction that might be contrary to current conditions regarding economic growth.
This is one of the most difficult concepts to understand; that the S&P 500 does not represent current economic growth conditions, but what the market believes is highly probable for the future.
We have recently witnessed a substantial move upward in the S&P 500, yet only recently have we seen some positive signs that economic growth may be slightly improving. I stress “slightly,” because no one really expects economic growth for 2013 to be massive.
While jobs growth has been relatively weak, there have been some signs that suggest economic growth is resuming. However, with much of the data, there can be quite a lot of noise that can distort the underlying strength or weakness of economic growth.
One example of a data set that does point to renewed economic growth, though the fundamentals may not be quite as strong, is the recent HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI), compiled by Markit Economics. In January, the China Manufacturing PMI came in at 51.9—a two-year high, up from 51.5 in December. The January China Manufacturing Output Index was 52.2—a 22-month high, up from 51.9 in December. (Source: “HSBC Flash China Manufacturing PMI™: Operating conditions improve at the quickest pace in two years,” Markit Economics web site, January 24, 2013.)
Initially, this seems to signal that economic growth in China is starting to resume, which would be bullish for the S&P 500. … Read More
The S&P 500 is at a crux, following its recent move to 1,502 on Thursday, the first time it was above 1,500 since December 2007. The index is up nearly 12% since July 24, 2012. The fear is that the index may be testing its third top at 1,500 since 2000, something I have discussed in the past.
The overall U.S. stock market is trending higher. About 75.2% of U.S. stocks are above their respective 200-day moving averages (MAs), versus 59.3% a month earlier. On a short-term basis, 86.2% of U.S. stocks are above their respective 50-day MAs, versus 63.6% a month earlier.
Take a look at the upward move of the S&P 500 stocks to above the 200-day MA; the move represents an 86% increase as of January 24, versus the 47% level in mid-November.
Chart courtesy of www.StockCharts.com
And there could be more to come, based on the seasonal trends. The November–April period has resulted in the biggest gain for the S&P 500, according to the Stock Trader’s Almanac. In the near term, watch to see if the S&P 500 can hold at 1,500 and move toward its record of 1,565 on October 9, 2007.
The chart indicates some concerns, in my opinion. Since its first top at 1,500 in 2000, the S&P 500 made another top in 2007; now we are precariously at a possible third top. The moving average convergence/divergence (MACD), as shown on the chart, shows a downward trend. Volume has also been declining, so we are seeing a bearish divergence between a higher S&P 500 and declining volume.
Chart courtesy of www.StockCharts.com
Technology has … Read More
As corporate earnings season continues for S&P 500 companies, it is becoming quite evident that revenue growth is lacking across many sectors of the economy. However, we are continuing to see growth in corporate earnings per share.
How is this possible? One method is through share buybacks. S&P 500 corporations, which are generating very high levels of cash, are buying back shares and reducing the number outstanding, which increases the corporate earnings-per-share level.
From April 2011 through October 2012, S&P 500 companies bought back and retired approximately eight billion shares, according to FactSet. This has been a significant driver for corporate earnings over the last two years. (Source: Cheng, J., “Investors See a Way Forward: Buybacks,” Wall Street Journal, January 21, 2013.)
If this level of share buybacks for S&P 500 corporations continues this year, we can expect to see corporate earnings increase by between five percent and 10%, without any organic growth in corporate earnings and flat revenues.
Another driver for S&P 500 share prices will be that the dividend yield will still remain very attractive when compared to U.S. Treasuries.
While revenue growth needs to begin to increase substantially at some point, I think 2013 will be another year in which the combination of a strong dividend yield and modest corporate earnings growth will result in the continuation of investment funds rotating out of the bonds and into equities.
Personally, I think a lot of buybacks are ill timed. While I like to see corporate earnings increase, the problem with many S&P 500 companies is that they tend to buy shares at the wrong time.
When the S&P … Read More
There are various measures to determine investor sentiment regarding the general market. The most obvious is to take a look at a broad index, such as the S&P 500, and see where it’s currently trading. Because price is truth, the market does not lie. If people are bullish or bearish, their actions in buying and selling shares within the S&P 500 will be translated into corresponding price moves.
However, it is interesting to look at corollary indications to determine how strong the underlying trend really is. Investor sentiment is extremely difficult to predict, as is anything in life. While the future is unknown, by understanding the strength of current investor sentiment, we can help form a picture about what the future holds for the S&P 500.
State Street has an Investor Confidence Index, developed by Kenneth Froot, a Harvard University professor, and Paul O’Connell of State Street Associates. According to State Street, “The State Street Investor Confidence Index measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors.” (Source: State Street, last accessed January 14, 2013.)
Let’s take a look at this metric of investor sentiment in relation to the S&P 500.
For the month of December, the Investor Confidence Index moved upward, just slightly higher than November, which was the low of 2012. Professor Froot commented, “As has been true for some months now, global institutional investor confidence remains weak as institutions continue to shy away from equities.” (Source: “Investor Confidence Index rises slightly in December by 0.4 to reach 80.9,” State Street, December 26, 2012, last accessed January 14, 2013.)… Read More
There has been so much focus on the fiscal cliff that I feel traders are ignoring the problems of slowing growth in corporate America.
The fourth-quarter earnings season begins tomorrow with Alcoa Inc. (NYSE/AA), the first DOW stock to report in this earnings season. Alcoa is one of the world’s top aluminum makers; the stock is also a good indicator for the global economy, as aluminum is used in many industrial applications, including aircraft, automobile, commercial transportation, packaging, building and construction, oil and gas, defense, consumer electronics, and industrial applications.
In the third-quarter earnings season, Alcoa beat on Thomson Financial consensus earnings, but its revenues are an issue, which will likely be the situation with many U.S. companies. For Alcoa, revenues are estimated to fall 6.3% in the fourth-quarter earnings season, followed by a 1.3% rise in the 2013 first-quarter earnings season, according to Thomson Financial.
For the fourth-quarter earnings season, the overall revenue growth is estimated to be three percent, according to FactSet (Source: “Earnings Insight,” FactSet, December 14, 2012, last accessed January 4, 2013.) This is simply not what you would expect if the economy was healthy. And while there is some hope and optimism for the fourth-quarter earnings season, I expect disappointment.
Based on the current estimates, earnings for the S&P 500 are estimated to rise three percent in the fourth quarter, according to FactSet. So far for the fourth quarter, 79 S&P 500 companies have issued negative earnings-per-share (EPS) guidance, versus only 30 companies reporting positive guidance.
The top-performing earnings growth predicted for the fourth-quarter earnings season is in the financial sector, according to FactSet.
The … Read More
Happy New Year to all of our Investment Contrarians readers!
In 2012, small-cap stocks were the second-best performing group, following the technology sector. The Russell 2000 was the top performer in December and has been since the end of the first quarter. How the small-caps fare this year will, again, depend on the global economy.
My stock analysis tells me that what happens in January will be an important indicator for the year as far as performance. Historical records indicate that stocks have increased an average of 1.6% in January since 1969, according to the Stock Trader’s Almanac. In 2012, January was a strong month, so it was not a surprise to see the relatively good advance in stocks.
As we move into 2013, the focus will be on any remaining fiscal cliff fallout and the impact of the deal, along with the eurozone mess, the U.S. national debt, and jobs growth.
For 2013, my stock analysis is cautious to start the year, based on the high global risk.
The fact that the economy is triggering some jobs growth is encouraging. My analysis is that this will likely continue in 2013, although the unemployment rate is expected to remain relatively high at over seven percent.
My stock analysis shows that we need to see leadership from such areas as the financial and technology sectors. The big banks were strong in 2012, but we also need to see technology take a leadership role.
It definitely will be a tricky year, given the global and domestic issues, along with suspect earnings and revenue growth to start the first quarter.
Again, as I … Read More
President Obama is on a fiscal cliff campaign to show why middle-class America really needs the help. Of course, Republicans want the Bush-era tax cuts to also apply to the top two percent of income earners. This is the major sticking point holding up a deal.
I love capitalism and the idea that you can generate unlimited wealth to drive consumer spending. This is the reason why the United States is one of the richest countries in the world, with its gross domestic product (GDP) growth driven by consumer spending. Yet despite the ability to create wealth, the income gap between the rich and poor has been widening, which ultimately impacts consumer spending. In my view, this is an issue that needs to be addressed, as there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as an avenue for income distribution may need to be fixed.
This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the Great Recession that began in 2008. Lower income levels impact consumer spending and economic growth.
The median family income plummeted to an inflation-adjusted $45,800 in 2010 compared to $49,600 in 2007, according to the Survey of Consumer Finances, a publication of the Federal Reserve. The survey also indicated that the top 10% of households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into less consumer spending by the middle class as income levels fade…. Read More
The only people crying “Y2K” back in 1999 were information technology (IT) professionals looking for job security. Even without their help, disaster was averted, the rising sun greeted the world on January 1, 2000, and life was good.
Fast-forward to 2012, and the doomsayers are at it again. Except this time, it’s the members of the U.S. government wailing about an “economic Armageddon” if the fiscal cliff isn’t averted come January 1, 2013. Unlike Y2K, the fiscal cliff is a real issue that needs to be addressed; but the end result will be the same: at the last second, disaster will be averted.
Unfortunately, as we make our way to the end of the calendar year, indecisiveness and political jockeying are spooking the global investing community and wreaking havoc on the markets. At a time when the international community needs the U.S., the world’s largest economy, to show confidence, it’s the political infighting capturing the spotlight.
In spite of all the wailing and gnashing of teeth, the fiscal cliff will be avoided and life as we know it will continue. And that’s when the real problems begin. With the centric fiscal cliff stealing all the limelight, it’s been tough for investors to focus on the fact that America’s economic rebound is contingent on a financially strong international community. Domestic economic growth cannot be stimulated in isolation.
In January 2013, investors will see that the real underlying factor affecting the stock market is the global economy and its impact on corporate earnings.
On November 15, it was announced that the collective economies of the eurozone fell by 0.1% between July and … Read More
October was ghoulish for stocks, with technology and small-cap companies facing the brunt of the market selling as investors sold and avoided higher-risk growth stocks, based on my stock market analysis.
The first quarter was excellent for stocks, but since it ended, the trading action has been mixed, with the S&P 500 moving lower in four months and higher in three months. The DOW, NASDAQ, and Russell 2000 have been negative since the end of March.
My stock market analysis shows me that we are currently at a standstill and waiting for a fresh catalyst to attract buyers. With Black Friday and the key holiday shopping season around the corner, things will likely pick up.
If you are into historical tendencies, we are entering the best six months of the year for investment gains, according to the Stock Trader’s Almanac. Based on historical records, investing during the six months from November to May has produced the best returns for stocks versus the June to October period. But things could be different this time around given the abundant risk, including the financial crisis in the eurozone, fears of more stalling in China, tension in the Middle East, the U.S. presidential election, and the upcoming fiscal cliff.
The near-term technical picture shows difficult chart resistance. The NASDAQ, S&P 500, and Dow Jones Industrials are stuck at below their respective 50-day moving averages (MAs) and looking for support at their 200-day MAs amid a lack of trading interest, according to my stock market analysis.
My stock market analysis of the S&P 500 shows a multi-year upward move. There’s some near-term topping action and … Read More
Many analysts and investors have been hesitant about the rally in the S&P 500. While I wasn’t surprised with the rally into the Federal Reserve announcement, I thought it highly likely that the S&P 500 would have a pullback in the fall. However, it appears that the S&P 500 is continuing its strong move up and, at this point, it would be quite dangerous to bet against this rally and the Federal Reserve.
Since the S&P 500 broke the downtrend in June, it has formed a very clean and resilient uptrend. In technical analysis, trendlines are extremely important. We note that in April of this year, the S&P 500 broke a long-standing trendline that is extremely important in technical analysis. This led to a subsequent decline in the market.
Another important note is that the highs reached in May of this year were not in excess of the highs reached in April. In technical analysis, if the S&P 500 cannot overtake its previous high, it is seen as extremely bearish. We saw the net results leading to a low in the S&P 500 in early June.
Chart courtesy of www.StockCharts.com
With this new uptrend developing, technical analysis will tell you to pay attention to whether or not the highs of the S&P 500 continually get broken. As is obvious by the chart, this is certainly the case. Another bullish sign is that the minor occurrence of the Relative Strength Index (RSI) being overbought in the middle of September has apparently been resolved.
In technical analysis, when the RSI becomes overbought, it does not mean that the S&P 500 will crash; … Read More
Small-caps were stellar in the first two weeks of September, with the Russell 2000 advancing an impressive—yet perhaps overzealous—6.4%. The broader market, along with blue chips and technology issues, has also shown great strides. For the year, technology and small-cap stocks are leading the pack, with the NASDAQ and Russell 2000 up 22.2% and 16.6%, respectively. These are the biggest gains in years, but I question their validity.
The S&P 500 is at multi-year highs, but every time I look at the long-term technical chart of the index, I’m concerned. Since 2000, there have been two major tops at above 1,400, and the current bull market rally from March 2009 appears to be heading for a third top.
The Federal Reserve-driven rally has been behind the buying, along with some perceived calm in the eurozone, with the recently announced bond-buying program by the European Central Bank (ECB). I continue to see risk in the U.S., eurozone, and China. In China, in particular, we are seeing a decline in consumer spending, which is worrisome because it’s the Chinese government’s prime focus. China is spending on additional stimulus, but the consumer needs to get involved.
Global delivery bellwether stock FedEx Corporation (NYSE/FDX) issued a deep cut in its guidance for fiscal 2013 due to the deterioration of the global economy. This was the second time FedEx cut its guidance, and with the company being a barometer on the global business environment, the news is a concern, raising a red flag as a signal to those who believe all is good.
In my view, I’m not getting dragged in by the rally. I … Read More
The S&P 500 topped 1,400 on Tuesday for the first time since May 3. The upward move was also the fourth top above 1,400 since 2008. In January, my stock analysis estimated the S&P 500 could test 1,400 this year, so the upward move has come a bit early.
Some in the media are even whispering about 1,500, but the last time the index was at this level was in October 2007 at the historical high.
The word “overextended” comes to mind at this juncture, based on my stock analysis. The fact is that since the amazing climb of the S&P 500 from 1995 to 2000, the index peaked on two separate occasions in 2000 and 2007, at above 1,400 and 1,500. And my stock analysis is looking at whether the current run-up from 2009 is sustainable and whether the index is heading for its third peak since 2000. You cannot tell at this moment, but, as the S&P 500 edges towards 1,561 (last achieved on October 8, 2007), it should become clearer, based on my stock analysis.
That high point may be tested in 2013 if the S&P 500 can rally another 11.5% from the 1,400 level. Again, it will be interesting to see if the index can break higher to a record high.
I’m not even convinced 1,400 will hold by the year-end, based on my stock analysis.
Following the break at 1,400 in March, the S&P 500 retrenched and failed to hold on two subsequent attempts at 1,400 in late April and early May.
The reality is the market is betting on a resolution and calm returning … Read More