Friday, May 31, 2013
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US Dollar closed lower on Thursday and below the 20-day moving average crossing at 83.43 confirming that a short-term top has been posted. The low-range close sets the stage for a steady to lower opening when Friday's night session begins trading. Stochastics and the RSI are bearish signaling that sideways to lower prices are possible near-term. If June extends this week's decline, the reaction low crossing at 81.78 is the next downside target. Closes above the 10-day moving average crossing at 83.89 would confirm that a short-term low has been posted. First resistance is the 10-day moving average crossing at 83.89. Second resistance is last Thursday's high crossing at 84.59. First support is today's low crossing at 83.02. Second support is the reaction low crossing at 81.78.
Euro closed higher on Thursday and above the 20-day moving average crossing at 129.69 confirming that a low has been posted. The high-range close sets the stage for a steady to higher opening when Friday's night session begins trading. Stochastics and the RSI are bullish signaling that sideways to higher prices are possible near-term. If June extends today's rally, the reaction high crossing at 131.98 is the next upside target. Closes below Wednesday's low crossing at 128.39 would confirm that a short-term top has been posted. First resistance is today's high crossing at 130.63. Second resistance is the reaction high crossing at 131.98. First support is Wednesday's low crossing at 128.38. Second support is April's low crossing at 127.51.
British Pound closed higher on Thursday. The high-range close sets the stage for a steady to higher opening when Friday's night session begins trading. Stochastics and the RSI are oversold but are turning neutral to bullish signaling that sideways to higher p rices are possible near-term. Closes above the 20-day moving average crossing at 1.5284 are needed to confirm that a low has been posted. If June extends this month's decline, March's low crossing at 1.4823 is the next downside target. First resistance is the 20-day moving average crossing at 1.5284. Second resistance is May's high crossing at 1.5603. First support is Wednesday's low crossing at 1.5006. Second support is March's low crossing at 1.4823.
Swiss Franc closed higher on Thursday and above the 20-day moving average crossing at .10447 confirming that a short-term low has been posted. The high-range close sets the stage for a steady to higher opening when Friday's night session begins trading. Stochastics and the RSI are bullish signaling that sideways to higher prices are possible near-term. If June extends today's rally, the reaction high crossing at .10719 is the next upside target. First resistance is today's high crossing at .10498. Second resistance is the reaction high crossing at .10719. First support is last Wednesday's low crossing at .10166. Second support is the July 2012 low crossing at .10148.
Canadian Dollar closed higher due to short covering on Thursday as it consolidated some of this month's decline. The high-range close sets the stage for a steady to higher opening when Friday's night session begins trading. Stochastics and the RSI are oversold but remain neutral to bearish signaling that additional weakness is possible near-term. If June extends the decline off May's high, last May's low crossing at 95.30 is the next downside target. Closes above the 20-day moving average crossing at 97.99 are needed to confirm that a low has been posted. First resistance is the 10-day moving average crossing at 97.02. Second resistance is the 20-day moving average crossing at 97.99. First support is Wednesday's low crossing at 95.91. Second support is last May's low crossing at 95.30.
Japanese Yen closed hig her on Thursday and above the 20-day moving average crossing at .9890 confirming that a short-term low has been posted. The high-range close sets the stage for a steady to higher opening when Friday's night session begins trading. Stochastics and the RSI are bullish hinting that a low might be in is near. If June extends today's rally, the reaction high crossing at .10147 is the next upside target. If June renews this year's decline, monthly support crossing at .9421 is the next downside target. First resistance is today's high crossing at .9955. Second resistance is the reaction high crossing at .10147. First support is last Wednesday's low crossing at .9640. Second support is monthly support crossing at .9421.
Thursday, May 30, 2013
By Market Authority
The 10 year bond yield pushed higher again today. It is currently trading at 2.15%. So why does this matter to the stock market? Why has the stock market all of a sudden gone from a straight up move to a choppy pullback? The reasons are extremely simple and I will lay them out below.
1. When rates rise, borrowing money becomes more expensive. As interest rates rise, housing will take a hit. The Federal Reserve has made it clear they believe housing is the key to an economic recovery. If interest rates jump, less Americans will be able to afford to borrow money to buy a house. The housing market will slow and the economy will follow. The stock market senses this.
2. The 10 year yield is now at 2.15. Yesterday, it crossed the dividend yield of the S&P 500. This means it is now more profitable to buy bonds than to invest in the stock market. Considering that the stock market is extremely high and possibly due for a correction, many investors are opting for the safety of bonds which are still going to pay out more than stocks on a yield basis. In simple terms, two investments, one pays you 2.15% with little risk while the other pays you 2.00% with a lot of risk, which one do you choose? The answer is obvious and a major reason why the stock market has started to get jittery.
These are the keys to understanding why interest rates/yields matter. The Federal Reserve wants to keep rates low so housing recovers, the economy does better, and money flows into stocks. The Federal Reserve keeps rates low by printing money in the form of quantitative easing. However, they cannot print forever. The market senses this and is beginning to react.
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Wednesday, May 29, 2013
By The Market Authority
October 15, 2007…
It was the day it all changed.
It was the day the very first baby boomer filed for social security benefits… with another 80 million waiting patiently behind her.
Baby boomers would begin retiring by the thousands shortly thereafter, clearing out their retirement accounts, spending millions of disposable income just to keep their bodies going another 30+ years.
Though, what many don’t realize is that this major formidable, 20-year event will change just about everything. Not just because this generation holds trillions in wealth… not just because they’ll force massive changes in Social Security and health coverage…
But because this group expects to have longer, more active lives…
And that means they’ll spend heavily – at any cost – to keep their bodies in tip-top shape.
More than 10,000 baby boomers will hit retirement age every day over the next 20 years. And nearly 75% of them expects to live well into their 80s… even 90s.
What’s more, they stand to inherit more than $15 trillion over the next 20 years. Retailers, marketers, doctors, gym equipment companies, and hair experts alike have already picked up on this very trend, as 80 million baby boomers spend whatever it takes to keep their bodies up to par.
GNC Holdings – a national retailer of health supplements – just announced that baby boomers are one of its biggest buyers of its products for high blood pressure, digestion, eye and brain health, and muscle and bone density.
The market for skin care and anti-aging products is expected to balloon from around $80 billion today to more than $114 billion by 2015, according to Global Industry.
Companies and clinics are promoting hormone replacement drugs as a way to slow the aging process, too. Some cost as much as $15,000 a year. In 2011, consumers spent $1.6 billion on prescription testosterone therapies, almost triple the amount spent in 2006.
According to the American Society of Plastic Surgeons, there were more than 13 million cosmetic procedures performed in 2010 – a 77% increase in a decade. An Associated Press poll found that 20% of baby boomers have either had or would consider cosmetic surgery. And, more and more men are requesting cosmetic procedures. For example, facelifts for men are up 14% from 2009-2010.
The global sports apparel industry is expected to soar well above $126 billion by 2015, driven by a trend toward healthier, more active lifestyles, with older demographics and women becoming more active, according to Global Industry Analysts.
Lastly, baby boomers will spend billions on weight loss to keep their bodies in top physical form. They’re joining gyms, weight loss clubs, exercising more, and could even turn to weight loss drugs, if need be. Who knows? But it’s something worth paying attention to as Arena Pharmaceuticals’ (ARNA) Belviq hits consumer shelves next month.
Even hair restoration – a $3 billion business on the rise – is popular among the baby boomer generation. Nobody wants to go bald or lose hair, but many of us will any way.
In fact, according to the International Society of Hair Restoration Surgery (ISHRS), more than 800,000 men and women sought surgical or non-surgical help for hair loss in 2008 alone.
Bottom line – the baby boomers and the biotech indexes are screaming for us to buy in.
Only fools would miss this.
Forbes just reported that the global market for pharmaceuticals could soar from $950 billion to more than $1.2 trillion by 2016.
Even the big boys are finally starting to catch on. Fidelity, Goldman Sachs, Black Rock, Vanguard and dozens more increased their holdings in biotech by more than $4 billion.
And if you’re in the right place at the right time, the windfall profits are endless. Because – let’s face it – making money from this solid, unbreakable trend couldn’t be any easier.
There’s one simple way to trade it…
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Tuesday, May 28, 2013
Where do investors turn for income in a yield-starved world?
There is a not-so-cynical view that Bernanke, Draghi and the other central bankers around the world have knocked interest rates so low to force investors into more speculative arenas to collect yield. Bonds and note yields are at or below the rate of inflation. And forget about CDs or passbook savings — these returns look like rounding errors for zero.
Even mom & pop investors have been forced into the stock market (helping fuel this rally) in search of yields and income. How do we know this? Because traditionally staid, plodding companies have been performing like growth stocks!
In the end of my April article, “I Can’t Believe It’s Not Cyclicals”, we discussed how traditionally defensive or counter-cyclical sectors like health care, utilities and consumer staples had been leading the charge in an up market. We showed how this pattern was very different relative to other recent bull runs. In that article, I suggested that the run up in defensive stocks would end when retail investors were convinced that the bull would last “forever” and then start rotating into higher beta cyclical sectors like technology and materials.
In the subsequent article, “Are We Unwinding the Defensive Trade?”, we saw this sector rotation is actually happening. The same logic applies to stocks that investors have bought for yield — they have helped underpin this rally and are now starting to unwind as market participants chase returns more earnestly. Let’s look at some of the evidence for this trend and discuss where it might lead us.
P & G Imitates Google and Other Yield-Starved Anomalies
Back when it still held a government-allowed monopoly, American Telephone & Telegraph was known as the stock “for widows and orphans.” It was a safe haven — a defensive stock that threw off a nice dividend. The same can be said for the telecom sector as a whole in the post-breakup era. While more volatile than utilities, they have the perception of a slow growth area with a service everyone needs (of course, many of the major telecoms have ventured into cellular, internet, TV and other areas — but we’re talking perception vs. reality here…). Both AT&T (Symbol:T) and Verizon (Symbol:VZ) throw off nice dividends of 4.9% and 4.0% respectively. And like many dividend stocks, they rallied during the first part of the year but have started to sputter during the latest up leg — along with other defensive stocks. Let’s take a look:
We can see this same phenomenon with many of the dividend darlings. Practically all of the utilities (Duke, Southern, American Electric Power, Consolidated Edison, etc.) and many consumer staple stocks (Clorox, Walmart, etc.) look similar.
One stock that got a lot of attention in the first quarter was venerable Proctor & Gamble. It’s list of products is a veritable “Who’s Who” of consumer products: Tide, Crest, Pampers, Head & Shoulders, Charmin and Bounty to name just a few. Over a century and a half old, this company had an impressive 6% revenue growth posted for the last year. Yet, over the past six months, its Price-to-Earnings ratio has been running from 17.5 to 19 — in the zone of growth stock! Even this dividend blue chip, though, has seen investors rotate away in the last few weeks of market run-up:
Of course, all dividend stocks haven’t topped. Lockheed Martin (symbol: LMT) and Johnson & Johnson (symbol: JNJ), for example, have kept making new highs along with the market. But the broader rotation is certainly away from the defensive and dividend plays and into traditional cyclical sectors. With that type of activity, the little bit of cash that remains on the sidelines can finally come in to chase returns. We can start to look for some market topping action, but as long as our central banks keep the spigots wide open, the markets can remain in turbo mode for much longer than the bears think is reasonable.
By Van Tharp Trading Education and Training Workshops
Monday, May 27, 2013
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Mohawk Industries, Inc. (MHK) recently delivered a solid first quarter earnings beat thanks to an improving U.S. housing market and expanding profit margins.
Analysts revised their estimates significantly higher for both 2013 and 2014 off the Q1 beat, sending the stock to a Zacks Rank #1 (Strong Buy). Based on current consensus estimates, analysts expect excellent growth from Mohawk over the next couple of years. With valuation still at reasonable levels, shares of Mohawk offers strong upside potential.
Mohawk Industries is a global flooring manufacturer focused on the production of carpet, rugs, ceramic tile, laminate, wood, stone and vinyl flooring. Its brands include American Olean, Bigelow, Dal-Tile, Durkan, Karastan, Lees, Marazzi, Mohawk, Pergo, Unilin and Quick-Step.
First Quarter Results
Mohawk Industries delivered solid first quarter results on May 2. Adjusted earnings per share jumped 50% to 87 cents, beating the Zacks Consensus Estimate of 84 cents.
Net sales rose 6% to $1.487 billion, driven by strong gains in the Dal-Tile and Unilin segments. The gross profit margin did decline slightly from 25.5% to 25.4% of net sales.
However, the adjusted operating profit margin expanded 140 basis points to 6.5% of net sales as the company leveraged its selling, general and administrative expenses. This led to a stellar 34% increase in adjusted operating income.
Earnings Estimates Soaring
Although Mohawk reported a relatively modest 3 cent EPS beat for Q1, analysts revised their estimates significantly higher for both 2013 and 2014. This sent the stock to a Zacks Rank #1 (Strong Buy).
In fact, the 2013 Zacks Consensus Estimate has jumped from $5.16 to $5.80 over the last 60 days. And the 2014 consensus has increased from $6.24 to $7.05 over the same period. You can see these sharp increases in the company's 'Price & Consensus' chart:
Analysts expect strong growth from Mohawk over the next couple of years too. Based on current consensus estimates, analysts project 53% EPS growth this year and 22% growth next year.
The Zacks Industry Rank is also very bullish for Mohawk. The 'Textile - Home Furnishings' industry is the #1 ranked industry out of 265!
Shares of Mohawk currently trade at 18x 12-month forward earnings, which is above its 10-year median of 15x. However, when you factor in the strong earnings growth projections and excellent earnings momentum, this premium seems reasonable.
The Bottom Line
With strong industry tailwinds, rising estimates and stellar earnings growth projections, Mohawk Industries offers attractive upside potential.
By Zacks Investment Research
Friday, May 24, 2013
Click Here for Your Urgent Free Metals Report: Read Bob Prechter's Big 5 Gold Warnings for Bulls and Bears
Gold bulls have been saying that gold must be priced far higher if it is to serve as the world’s money. But the September 2011 issue of The Elliott Wave Theorist made a case that gold at $1921.50 was expensive:
Those who argue that gold is still cheap might want to consider [this chart], which shows that since 1913, when the Fed was created, gold has achieved four times the gain of the Consumer Price Index.
Gold and silver have been THE financial news in recent weeks. The coverage began during mid-April's three-day price decline, but the real precious metals story goes back further than that. Since 2011, gold and silver have declined more than 30% and 50%, respectively. Continue reading to learn more, or get ahead of the trend by reading Bob Prechter's Big 5 Gold Warnings for Bulls and Bears. Read more about Prechter's urgent report now.
Volatile price action is a surprise to most investors most of the time.
That's definitely true of precious metals in the past 30 days. But, the real story is far bigger than just one month. In fact, gold and silver have seen declines of more than 30% and 50%, respectively, since 2011. Now that's news!
If you invest in precious metals, you owe it to yourself to read this brand-new report, Bob Prechter's Big 5 Gold Warnings for Bulls and Bears, from Elliott Wave International.
Inside the new report, you'll learn the truth about:
1) Central Bank Buying
2) Fed Inflating
3) The "Crisis Hedge" Argument
4) The "Gold is Cheap" Argument
5) The Conviction that Post-Peak Lows were Support
Click the image link above and you'll see a stunning chart of some of EWI's gold and silver forecasts over the past three years. When a market's wave patterns are clear, as they are now in gold and silver, it is a remarkable sight.
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Thursday, May 23, 2013
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The Market Authority reported that the Federal Reserve Chairman Ben Bernanke testified in front of the Joint Economic Committee. In his opening remarks, the head of the central bank has signaled that he shall continue to keep the current quantitative easing program in place. Traders and investors easily saw the decline in the U.S. Dollar Index after his comments were released. Chairman Bernanke warned that reducing the Federal Reserve’s efforts to keep borrowing rates low would carry a substantial risk of slowing or ending the economic recovery. This means that he will keep interest rates at zero percent and continue to buy $85 billion a month worth of mortgage backed securities and U.S. Treasuries for the foreseeable future.
Elliott Wave International reported that yesterday U.S. stocks rose at the open but then reversed sharply lower. For the DJIA, it was the biggest 1-day swing in 6 months.
The move coincided with congressional testimony by the Fed Chairman Ben Bernanke. I say "coincided," because the market's mood, visible via Elliott wave patterns, was suggesting a nearby top even before Mr. Bernanke's comments.
See for yourself. As early as May 20, the S&P 500 was showing this wave pattern (partial wave labels shown):
As you can see from the above chart, the market was finishing a wave 5, the ending wave of an Elliott wave sequence. That was the reason why before the open on May 22, our U.S. Intraday Stocks Specialty Service expected a move higher yet warned of a nearby top:
May 22, 2013 09:20 AM
Market Overview: Good morning. Higher futures numbers this morning suggest this advance may not be quite done. At least in the NASDAQ that is what the internals suggested for the fifth-wave of an ending diagonal, so a flexible view of the count in the other markets should be maintained. The internals for this move up from the April pivot low suggest all of five-waves up may be in place.
Another morning intraday comment gave an upper price target, 1683-1684:
5/22/2013 10:06:20 AM ET
The new high this morning suggest wave v is extending as a larger five, which would likely make this immediate action a third-wave within v. It was noted yesterday that a measure potential target was up around 1683/84. Looks like that's where trade is headed.
The topping expectation came true later on May 22, when the market hit a high of 1686.73 and reversed sharply to end the daylike this:
From the intraday high of 1686.73, the S&P 500 fell 36 points.
Click here to find out what's next for U.S. stocks.
Wednesday, May 22, 2013
By the Market Authority Speed Retirement Hyper-Compounding Strategy
As we all know, almost every central bank in the world is printing money to boost exports and support asset prices in the stock market. To their credit, the money printing idea has worked as markets around the world have been rallying. Japan is now the most aggressive money printing country. The Bank of Japan (BOJ) said that they would put $1.4 trillion into the economy over the next two years. The Nikkei 225 Index (Japanese stock market) has gained nearly 7,000 points or 80.0 percent since October 2012. This rally in the USD/JPY, and the Nikkei 225 Index has been parabolic and shows the power of money printing or the devaluing of the currency.
At this time, the major stock indexes around the world seem to be trading higher when the Japanese Yen declines against the U.S. Dollar. Traders can simply look at the chart below and see how the S&P SPDR 500 Trust (black line) and the USD/JPY (green line) trade higher together. The red line is the SPDR Gold Shares which is trading inverse to the USD/JPY. The bottom line, if the Japanese Yen starts to strengthen against the U.S. Dollar the current rally in stocks could come to an abrupt end.
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Tuesday, May 21, 2013
Yesterday, the leading social networking stock in the world Facebook Inc (NASDAQ:FB) came under selling pressure again. This stock has been selling off since May 3, 2013, when it traded as high as $29.07 a share. Yesterday, FB was trading lower by 0.38 cents to $25.87 a share. With this action in the stock price comes trading opportunity; swing traders should watch for some near term support on the Daily time frame chart around the $25.00 area. Short term day traders should also watch for intra-day support around the $25.80, and $25.32 levels. Both areas should provide for a bounce in the stock price.
Some other leading social networking stocks that have been weak lately include LinkedIn Corp (NYSE:LNKD), Renren Inc (NYSE:RENN), and United Online Inc (NASDAQ:UNTD). Yesterday, all of these social media and networking stocks were trading higher with the exception of Facebook Inc which continues to lag the industry group.
By the Market Authority Ultimate Income Strategy
Monday, May 20, 2013
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What do you do when you buy a new house or condo? Buy furniture, of course. Suddenly, that old sectional with the dog hair stuck to the pillows isn't looking so hot.
Zacks Investment Research reports Haverty Furniture Companies, Inc. ( HVT ) is looking to cash in on the housing recovery. This Zacks Rank #1 (Strong Buy) is expected to grow earnings by 63% in 2013.
Havertys has seen it all. The company was founded in 1885 in Atlanta and used to make deliveries in horse and buggy. It now has showrooms in 16 Southern and Midwest states. Havertys went public in 1929 during dark economic times, but it has survived each of the big economic shocks.
The impact of the recent housing bust is obvious in Havertys multi-year earnings history. Earnings plunged 88.7% in 2007 to just 8 cents before the rest of the country went into recession and took Haverty's even lower.
The company didn't make money in either 2008 or 2009. Even 2010 and 2011 were still a struggle. But in 2012, the turnaround in the housing market, and the consumer, began to take hold. Havertys made 67 cents that year and it has seen rising earnings ever since.
As Housing Improves, So Does Havertys Business
On May 1, Havertys reported its first quarter results which easily beat the Zacks Consensus by 33%. Consumers were in the mood to shop to start the year as sales jumped 13.8% to $186.1 million while same store sales rose 11.5%.
It's not surprising that house sales and median home prices were rising throughout the quarter and Havertys business remained solid.
Gross profit margins were up 130 basis point to 53.5% from 52.2%.
Gains To Continue
The company also said that the total delivered sales to date for the second quarter were already running 14% higher over the same period a year ago.
It did try to temper expectations for the full year, though, saying that gross profit margins for the year, while improving, won't be as hot as the first quarter.
Housing Recovery Play Not a Secret
Investors have been all over the housing recovery stocks for the last year. The improvement in the housing market isn't exactly a secret anymore.
Shares of Havertys have soared since last summer to multi-year highs.
But, its valuation still isn't excessive. It's trading with a forward P/E of 22 and a price-to-book of just 2.0.
Consumer sentiment is finally reaching pre-recession levels which means that people believe the economy, and their own personal fortunes, are improving. The rise in stock and housing prices have a lot to do with that.
During times that you're feeling better about your financial situation, that's when you're likely to buy big ticket items like new furniture.
For investors looking for a way to play the housing recovery outside of the homebuilders, Havertys is one stock worth checking out.
Friday, May 17, 2013
Click Here to Test Drive Risk Free for 60 Days
Adrian F. Manz has earned his living trading equities in his own account since 1998. He holds a Master's degree in Psychology, an MBA in International Business and Finance from the prestigious Peter F. Drucker School of Management and the Claremont Graduate University, and a Doctorate in the Organizational Behavior from the Claremont Graduate University. Dr. Manz has developed a trading style that relies on statistical, technical and fundamental analysis in the planning of every trade. Since 1998, he and a close circle of associates have utilized these techniques to develop trading ideas that have allowed them to persevere even in the face of some of the worst market conditions traders have faced in many years.
Adrian is a frequent speaker at trading conferences and seminars and has been a recurring guest on financial radio. Through MarketAuthority, subscribers can access Adrian's nightly trade selections, and review the planned scenarios as they unfold each trading day. Adrian will provide his input each day in his membership area.
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Thursday, May 16, 2013
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GuruFocus is dedicated to value investing. As employed by Warren Buffett, the greatest investor of all time, value investing is the only winning strategy for the long term. GuruFocus hosts numerous value screeners and research tools, and regularly publishes articles about value investing strategies and ideas. GuruFocus also publishes three newsletters: Monthly Ben Graham Net-Net, Buffett-Munger Best Bargains and Microcap Magic Formula Stocks. You can gain full access to GuruFocus with Premium Membership.
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Wednesday, May 15, 2013
By Zacks Investment Research Earnings Estimates Stock Rank
It's that time again. Every few months, I like running this screen to see which Sectors are considered the best Sectors.
Since roughly half of a stock's price move can be directly attributed to the group that it's in, it's important to stay on top of which groups are the best ones.
And with the brunt of earnings season having just completed, some new groups have found their way on this list.
In my testing, I have found that getting into an average stock in a strong group will oftentimes outperform even the best stocks in a troubled group.
Put the Odds on Your Side
Just because stocks in the best groups have a tendency to outperform doesn't mean you can just pick anything and make money. Far from it. But it illustrates how powerful the underlying group is to the success of your stock picking.
There are several ways you can define the best Sectors or Industries.
Today, I'm going to focus on just the Zacks Rank. The best Zacks Rank stocks, on average, nearly triple the market each year. And a sector or Industry is simply a group of stocks in similar businesses. So looking at the average Zacks Rank for all of the stocks in that group will tell you if that group as a whole is enjoying good times or bad.
Stocks that receive upward earnings estimate revisions have a tendency of receiving even more upward earnings estimate revisions. And that leads to an increase in price.
So the better the average Zacks Rank is for the Sector, the better the chances that your stocks have a top Zacks Rank, and move higher.
And given the uneasiness of the market at these new highs, this is something everyone can use right now.
The Top 5 Zacks Ranked Sectors
Currently, the top 5 Zacks Ranked sectors are:
1) Construction - Average Zacks Rank 2.74
2) Aerospace - Average Zacks Rank 2.81
3) Finance - Average Zacks Rank 2.82
4) Utilities - Average Zacks Rank 2.88
5) Auto/Tires/Trucks - Average Zacks Rank 2.91
And here are 5 stocks, each from one of the top 5 Zacks Ranked sectors:
( RYL ) Ryland Group Inc. - Construction
( ATK ) Alliant Techsystems Inc. - Aerospace
( STT ) State Street Corp. - Finance
( IDA ) IdaCorp, Inc. - Utilities
( SMP ) Standard Motor Products Inc. - Auto/Tires/Trucks
All of these stocks are in the top 5 Sectors as defined by the average Zacks Rank, and they all look set to outperform.
Start picking stocks in the best Sectors and Industries on your own today. It's easy to do with the Research Wizard. Start putting the odds of success in your favor.
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Tuesday, May 14, 2013
Early Origins of the Money Game
Croesus and Greek Civilization
By Van K. Tharp Ph.D.
When I first proposed writing a series of articles on the money game, I received a complaint from someone who said that most of my focus was on Americans. What about the Europeans or Asians? Well, there were reasons for my emphasis on Americans. First, while I was concentrating on some of the richest people of all time (including the Rothschilds and the Medicis), most of the people on that list prospered in the United States between 1850 and 1910. The period of time after the American Civil War was one of the greatest times for profit in the history of the world. You could make your own rules for playing the game because there was minimal government regulation in American business and no income tax. Those two factors had a huge impact on wealth accumulation. For example, I believe my net worth would probably be about 100 times what it is now if there was no income tax today. In any case, those who played the game well in the US in the fifty years after the Civil War became money giants.
For much of the history of Europe and Asia, one has to consider the impact of royalty on the wealth factor. If you had a significant amount of money in an area that had an all-powerful ruler, then there was a good chance that the ruler considered everything in the kingdom as belonging to him. Thus, if you didn’t play good politics with the royal family, they could take your money away. In fact, royal families would have to be considered part of the money game in old Europe and that’s not a relevant factor today.
Nevertheless, I just finished a great book, The History of Money, which inspired the next three articles in the money game series. These next three articles will not focus on particular people, but on particular eras.
This article will cover the ancient Greeks and the development of gold and silver coins.
The second will be on the money’s impact on the rise and fall of the Roman Empire.
And the third will talk about the impact of the Roman Catholic Church on the money game with a special reference to the Knights Templar.
The Origins of Coinage
Most everyone has heard the phrase “Rich as Croesus.” Well, Croesus basically changed how the money game was played. The ideas of the Lydian kings, like Croesus, paved the way to incredible wealth and to a culturally rich society — the Greek Civilization. So, how did that happen?
Homer portrayed people of combat and heroism and wrote about anger, war, heroism, passion, violence, honor, etc. Money had no place in the poems of Homer because people were only interested in honor. Towns tried to be as self-sufficient as possible so they would not have to trade with neighbors; neighbors could be dangerous.
Somewhere around the seventh century BC, the Lydian people who inhabited the western part of modern day Turkey, recognized the need for a portable wealth. They manufactured coins made of electrum, a naturally occurring mix of gold and silver. These coins were thick slugs about the size of the end of one’s thumb. Each coin was stamped with a lion’s head to guarantee its authenticity and standardized in weight and size to eliminate the need to assess its value each time it was used. This made trading easy and it opened up trade to new segments of the population.
Around 560BC, Croesus ascended the throne in the kingdom of Lydia and things started to change. During his 14 year reign, Croesus created new coins made of pure silver and gold. This created more opportunity for commerce and the invention of the retail market. Rather than having to find the home or shop of a craftsman, you could go to a central market to purchase items there. Anyone could come to the central market and buy or sell items with gold and silver coins.
Coinage also affected traditional societal roles. The Greek historian, Herodotus, was said to have been horrified to find that women could choose their own husbands because they could have dowries to aid them in their selection. In addition, the first known brothels arose around these times as part of the “market.” Women could work in the brothels long enough to secure a dowry big enough to find the husband they wanted. In addition, the Lydians were credited for creating the first gambling games around this time.
Commerce created the fabulous wealth of Croesus. But he also squandered it on two common weaknesses for kings — buildings and armies. It was said that he conquered most of the other Greek cities, after which he built extensively in them. This process eventually led to his downfall. As he considered a campaign against the Persian Empire, Croesus asked the oracle at Delphi what chance he had and was told a great empire would fall. Croesus interpreted the prophecy as a favorable sign that he would conquer the Persians but it was his great empire that would fall.
The Ancient Greeks
After Croesus fell, the surrounding Greeks adopted the Lydian practice of making coins and commerce began to flourish throughout the Mediterranean. Eventually, the Greeks replaced the Phoenicians as the greatest traders of the Eastern Mediterranean.
Coinage offered stability to this trade because it provided merchants with a permanent medium of exchange. Previously, money had consisted of some prominent, but usually perishable commodity. Once money was based upon rare metals, however, these coins provided people with:
Ease of use
A non-perishable way of storing wealth.
At the time, other civilizations had been based on a strong authority supported by a massive army and by wealth collected as tribute. Kinship and brute force were the primary methods for organizing societies.
Money helped Greece organize its society on a much greater scale than was previously possible. Money didn’t require extensive administration, police or military systems. Money especially suited Greece at that time because it was a loose structure of many relatively independent city states.
Those in power saw the advantages money offered them. They could collect money for taxes rather than collect commodities which could perish before they were used. Even crimes could be monetized so if someone committed a crime, they could pay a penalty rather than being killed.
In addition to money providing a medium of exchange for goods, it allowed payment for services. People could work and get paid for doing a service and that service had value. Not only could you buy a loaf of bread, you could also pay someone to clean your house, commission a poem, or obtain sexual services – all because of money. People began to work to get paid rather than being forced to do so.
Money enabled an artistic culture to develop. People could produce a work of art (music, painting, a play, etc) and get paid to do so. Athens became a center for artistic culture and flourished as one of the wealthiest Greek city-states. Interestingly, the basis for most of Athen’s money was silver for which they had an ample supply after discovering rich deposits in Laurium, south of the city.
Politics too started to change as a result of money. The Greeks had to deal with debt and at one point they passed a law canceling it. It didn’t work, but at least they tried. Prior to money, you could only vote if you owned land. But after the development of coinage, having wealth also gave you the privilege to vote. Essentially a great civilization flourished, and the center of that civilization was the marketplace.
Too little was written during that particular era of history to understand how individuals played the money game; however, it was obvious that the rules of the game changed considerably as coinage emerged and evolved. Greece went from a society dominated by honor to one dominated by commerce, in which culture was now able to flourish. Those who had the ability to see what was happening could easily dominate the money game, however, there are insufficient records to know who those people were and how they played.
About the Author: Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and outstanding Peak Performance Home Study Program, a highly regarded classic that is suitable for all levels of traders and investors.
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Monday, May 13, 2013
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Financials have been strong performers in this latest leg of the recovery, as these once beaten down companies have come back strong over the past six months. Yet while many investors might focus in on big banks for their exposure to this segment, one corner of the financial world has been doing even better; insurance.
This segment has seen even better performances than both the broad financial sector and the S&P 500 in the past few months, including a nearly 20% gain YTD for many broad insurance benchmarks. And with some shakiness on the revenue front for many big banking institutions, those who want to make a play on financials could be better served by looking at the insurance segment for exposure.
While many investors might focus in on big names like Progressive ( PGR ) or Travelers Companies ( TRV ) for exposure, taking a closer inspection of some overlooked smaller caps could be a better way to go. This is especially true if these firms are seeing solid estimate revisions and a clear path for growth, such as in the case of XL Group PLC ( XL ) .
XL Group in Focus
XL is an Irish-based global insurance and reinsurance company providing property, casualty and specialty products to a variety of organizations around the globe. The vast majority of their revenues are derived from premiums, though their investment income and underwriting business also contribute meaningfully as well.
The company has largely benefited from a lack of huge catastrophes in the recent past, which has helped them to keep earnings elevated. This trend, plus the added boost from the underwriting division—which increased threefold year-over-year—has helped to put the company in a very solid position (in a top performing industry no less) going forward.
Analysts have also begun to take note of this positive trend and have begun to increase their expectations for the company. While the near term picture for this metric is still mixed from a revision look, the current year and next year figures are pretty rosy.
In fact, in the last 60 days, we have seen 12 estimates move higher for the current year and ten move higher for the next year time frame. This compares to zero downward revisions for the 2013 fiscal year, and just one down for the 2014 time frame; a ratio (when combined) of 22 to 1 in favor of positive revisions.
But analysts haven’t just been revising their numbers up a little bit either, as the consensus has been shooting higher for both time frames. Just 90 days ago the 2013 consensus stood at $2.44/share while today it is at an impressive $2.87/share, a 17% increase in a quarter’s time.
While some might think this is too lofty of a goal for the company to reach, it is worth noting how admirably the firm has performed in earnings season. XL has beaten estimates by double digits in each of the past four quarters and has seen an average surprise of over 56% in the time frame, meaning that the firm is definitely capable of some big beats.
Click the Image for a Larger View
This impressive earnings picture has bumped up XL to a Zacks Rank #1 (Strong Buy), putting it in elite company, and suggesting that it is a great investment right now. This is even more true when you consider that the stock has a Zacks Recommendation of Outperform, and that the insurance- property & casualty industry is one of the top 10 (out of 261) industries in the entire market.
If this solid earnings picture and top Zacks Rank wasn’t enough, it is also worth pointing out some of the shareholder friendly initiatives that the company is undertaking. These items look to help boost interest in XL and make it stand out even more when compared to its peers.
The firm bought back eight million shares and still has a big chunk of capital to buyback more shares in the weeks and months ahead as well. Additionally, the firm also boosted its dividend by 27%, to 14 cents a share, so it is doing its best to make shareholders happy on this front too.
Financials seem like a great play and have seen strong momentum over the past few months. However, the real winning play in this segment has been insurance, as this corner has surged higher that both broad financials and the overall market.
While a broad play on the space could be an interesting idea, a look to XL could be a better choice. This firm has a tremendous earnings story, an increasing dividend, and stock buybacks, making it a great triple threat for investors as we approach the summer months.
By Zacks Investment Research
Thursday, May 09, 2013
5 Secrets of Wall Street by Zacks Investment Research
Investing can be a jungle, a battlefield, even a nightmare if you don't follow sound principles of diversification and risk management. The good news is that in the age of the Internet, the self-directed investor has been given access to the research and tools of the professionals.
The bad news is that the business of investing still has its own unwritten rules that can trip you up if you're not careful. You could call them "secrets" because when you listen to a pro talk about how he or she is making money on a particular stock, they don't tell you this part.
Secret #1: They Have to Buy
What is the business of institutional investors who manage other people's money? It is to deploy that capital. Lots of different equity portfolio managers have mandates and performance benchmarks that create certain behavior, such as being fully invested even when the market is peaking.
I am not even addressing how analysts or brokers work on the Street to facilitate this business. I'm just talking about fund managers having a bias to buy stocks, not short them. How strong a force is this bias? Trillions strong.
The combined assets of the nation's 4,500 equity-only mutual funds stood at over $7 trillion in March. It is the business of these portfolio managers, along with hundreds of others at pension funds, insurance companies, and endowments to put this capital to work in stocks.
On top of this money ear-marked for equities, there is over $2.6 trillion in money market funds, and another $3.5 trillion is sitting in various bond funds, based just on the reported data of 2,500 funds in the Investment Company Institute survey. This is all "cash on the sidelines" that could help PMs do their primary job: buying stocks. While they "have to buy," we enjoy the freedom to control our investment cash and decide what to buy and when.
Secret #2: They Don't Have to Sell
In this secret, I exaggerate (only slightly) to make the point about the pain tolerance of the aforementioned groups, whose job it is to buy stocks with other people's money. It's easy to watch stocks lose 30%, 60%, even 90% when it's not your money.
Do you know what the greatest risk is for a fund manager? It's not losing money or clients. It's underperforming their benchmark (most commonly either the S&P 500 or the Russell 2000). So if stocks are peaking and then turn down, who knows if it's the top? What if the index surges higher again?
For the most part, they can handle the 20% downturn. But they can't miss the last 10% of upside, especially if they've struggled in their stock-picking at all that year and are at risk of underperforming their peers or benchmark. When you understand at what points in the year fund managers are likely to feel "underinvested," you can take advantage of their fear and greed.
Secret #3: Sector Rotation
This one is simple: money doesn't leave the markets, it just moves around. Especially when interest rates are near zero. Especially when equities still offer the best risk/reward overall compared to other asset classes.
And this one also has quite a bit to do with the economic cycle. During the early expansion phases, it's good to be in "cyclical" sectors such as industrials, materials and energy. As the cycle starts to approach its peak, money will move back out of these areas.
But lately the moves seem hair-trigger in nature. The media loves to call it the "risk on/risk off" trade. With fast-money hedge funds taking short term positions in cyclical stocks, commodities, currencies and ETFs, risk on/off is a very accurate way of describing the "light switch" nature of this trade flow.
Just keep in mind that while the momentum players, who are using lots of leverage in their risk taking, have to move in and out fast, there still exists a longer, slower approach to economic cycle investing that you can benefit from. Knowing where we are in the cycle and which sectors are trending accordingly can put a tailwind behind your investment ideas.
Secret #4: Technology, Liquidity & Speed Rule
Speaking of hedge fund momentum players, this secret explains why they move markets and make so much money doing it. It also explains why you have to work harder & smarter to beat the pros.
I call the world of institutional traders one of "total immersion, instant access." Pro traders are swimming in rich information networks, amid oceans of research, and surrounded by analysts who can summarize it all for them instantaneously. They also have amazing technology, tools and systems to help them quickly capture a majority of high-probability trading opportunities.
Then there are the automated trading systems, the "algos." Algorithmic trading has overtaken markets in many ways. It's not that the machines rule. It's more that they have entrenched themselves by providing constant streams of liquidity that almost can't be matched by human traders.
And the technical "model" funds - essentially, computer programs that use price and volume formulas to trade - will never stop inventing new systems to capture market swings. They run stocks up and they run stocks down, without regard for fundamentals, or sanity.
But while sharks abound in Wall Street's waters, we can profit using their same tools and tactics.
Secret #5: Risk Management Isn't a Science
Speaking of super models, one of the most dangerous ever didn't walk a fashion runway, but it did earn its creators a Nobel Prize. The Black-Scholes option pricing model is "dangerous" because it ushered in the era of derivatives.
Not that there's anything wrong with derivatives like options and futures. But other complex financial engineering - like the kind that spawned the sub-prime housing bubble and subsequent banking meltdown - can be very dangerous indeed.
Why? Because they are all based on some variation of the same quantitative methods used in Black-Scholes. Specifically we are talking about standard deviation and the bell curve.
And these quant tools offer Wall Street the illusion of control and safety. If you can measure the past, and its variations, you can model the future. Sounds simple enough. And it sounds so objective and scientific without appearing to offer precise predictions.
"Don't worry," the quants say. "The statistical volatility (risk) is only X."
The problem is that standard deviation was invented to measure the variation in physical phenomena like the anatomy of animals and the structure of the universe. Nature has an order, and science is all about discovering it, measuring it and classifying it so that we can make reliable predictions about the world.
Markets, meanwhile, are anything but natural physical objects that can give us reliable "standard" measurements. Markets are social beasts with unpredictable "wild randomness" as Nassim Nicolas Taleb calls it his book The Black Swan.
What does all this mean to us? While some on the Street would have us believe that markets are efficient and rational, they are actually more subject to bubbles and shocks. And that spells opportunity for traders who can exploit the emotional extremes of optimism and pessimism.
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Tuesday, May 07, 2013
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Technical and fundamental analysis are the two main types of analysis in the investing world. Technical analysis is mainly concerned with price movement of a security using charts and technical studies to predict its future price movements. On the other hand, fundamental analysis looks at economic factors, which are commonly referred to as the “fundamentals,” hence the term fundamental analysis.
Fundamental analysis looks at the financial data of the company behind the stock to determine whether the company’s business will result in a higher or lower stock price. Fundamental analysis looks at revenues, profits and losses and business trends, as well as seeking growth factors that will affect the stock price. Fundamental analysis may also review more macroeconomic factors such as a company’s business sector and the overall economy in relation to a company’s lines of business. Fundamental analysis is geared toward understanding the company behind the stock. Some of the specific factors we focus on when doing fundamental analysis are:
1: Macro economic factors such as Supply and Demand and other economy new and specific industry factors.
2: Micro or company specific data including such things as Price/Earnings ratios, Price/Sales ratios, Price/book value rations, etc. Profitability: looking at gross sales, gross profit margin, operating margins, earning per share, and net profit margin. Also, factors like growth rates, Potential revenue growth, financial strength, return on investments and return on assets. Sometimes these many company specific factors are complicated and difficult to understand.
Now on the other hand, technical analysis of stocks primarily ignores the company specific issues behind a stock. Technical analysis looks at price action and volume using charts patterns and technical indicators. The theory behind technical analysis is all information about a stock is built into or factored into the share price and analyzing the price movements will predict where a stock price might go. Traders using technical analysis rely on price charts, which include analytical indicators to help traders recognize price trends or reversals and profit from these expected outcomes.
Technical analysis is appealing and has become more so in recent years, due the fact that trading systems can be developed with a specific set of rules to trigger buy and sell orders. There is also a wide range of indicators for a trader to choose from, allowing the trader to set up a trading system to fit his or her trading style. The negatives of technical analysis are using historical data to predict the future – which doesn’t always work or don’t always predict the future price action perfectly, also the different signals the different technical tools can generate make some systems confusing. Fundamental analysis is more dependent on a trader’s judgment concerning a company’s financial data. A trader using fundamental analysis can understand everything correctly about a company and stock and still see the stock go in the opposite direction because of some additional or external factor not taken into account. Fundamental analysis is sometimes favored for longer time investing, while technical analysis is often considered the better style for shorter-term trading.
For short-term trading, I definitely prefer a short-term trading plan based on price action charts using simple technical indicators while also maintaining an awareness of the fundamental factors, especially broad economic factors which may affect a specific stock or industry that I might be invested in.
By Profits Run
Monday, May 06, 2013
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Zacks Investment Research reports that the broad financial sector has been a strong performer so far in 2013, as it has been leading the market in the year-to-date timeframe. Furthermore, the space has actually been beating out the S&P 500 from a one year look as well, suggesting a pretty strong trend of outperformance for this key market sector.
However, we have begun to see some new trends develop in this corner of the market during the current earnings season as big banks have been having a bit of trouble. Major banking institutions have been doing quite well on earnings, but have seen sluggish revenues, suggesting that they may have a bit of trouble growing in the near future.
For this reason, it may be time to look elsewhere in the financial sector for better growth candidates, and for firms that are better poised to take advantage of current market trends. And with the domestic economy coming back a bit, investors may want to focus on regional banks like Private Bancorp ( PVTB ) for their exposure.
PVTB in Focus
While PVTB was beaten down in the financial crisis, the company is now back on track and a tremendous value. The firm has seen a solid start to 2013, as the stock is up about 18% year-to-date, while its PEG ratio is still well below the industry average at just 1.76.
Furthermore, unlike many of its peers in the space, PVTB could see a very strong performance in terms of earnings growth in the near future. Current expectations call for year-over-year growth of nearly 68% for the current quarter, and an impressive 49% growth rate for the current year.
While this might seem like a lofty target to some, it is important to note that analysts seem pretty confident in the firm’s prospects, as all of the recent estimates have gone up. Furthermore, the consensus earnings expectation for the current quarter and next quarter—as well as the current year and next year—have all gone up in the past 30 days.
This suggests that many are feeling even more optimistic about the company in the near term, and that even better days could be ahead for PVTB. This is especially true when investors consider the firm’s recent history when it comes to earnings surprises; it hasn’t missed in the past four quarters and has actually seen a 22% average beat in the trailing four periods.
Thanks to this confluence of factors, the stock has earned itself a Zacks Rank of 1 or ‘Strong Buy’. The company also has a Zacks Recommendation of ‘Outperform’ as well as an industry rank in the top quarter, meaning that both the short and long term picture are looking quite well for this company.
If this impressive earnings picture wasn’t enough for you, there are a couple of other strong points that could sway you to the bull side for this stock. According to the recent earnings report, net revenues for the company showed growth in the year-over-year period, suggesting that PVTB has been able to avoid some of the top-line growth woes that have impacted its larger counterparts.
Furthermore, there were some other encouraging stats from the company such as its non-interest income increasing 11% year-over-year, thanks to more mortgage banking and syndication fees. The firm also said that total loans grew 9% year-over-year, so PVTB has had little trouble expanding its core business either.
Financials remain a strong sector in the market, and one that continues to lead the way higher in 2013. There are a number of solid choices in the space though, and investors have largely focused on big banks for their exposure.
However, there are a number of smaller companies that could be better growth candidates in the near future, both from an earnings and revenue perspective. One such firm is Private Bancorp, and thanks to their top Zacks Rank and strong revenue growth, they could make for a great pick for financial-focused investors at this time.
Thursday, May 02, 2013
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Wednesday, May 01, 2013
I Can’t Believe It’s Not Cyclicals! This Tentative Bull Market
By Van Tharp Institute of Trading Mastery
The best advertisers have a talent for making a phrase (one that is hopefully associated with their product or service) stick in our minds. For fun, let’s see how well they’ve done. Please fill in the blank for these popular advertising catch phrases (extra credit if you get the associated product):
“Melts in your mouth, not __ ____ ___”
“Breakfast of _________”
“Good to the Last ____”
“Plop, Plop, Fizz, Fizz, — __ ____ _ ______ __ __”
“I Can’t Believe It’s Not ______”
Answers are at the bottom of the article (my apologies to those outside the U.S., though I’m sure there are advertising slogans in your country that are equally as memorable!).
The last slogan I listed came to mind when I was doing some sector research recently. “I Can’t Believe It’s Not Butter” is (cleverly) both the margarine’s brand name and catch phrase. The commercials for the butter substitute include various celebrities tasting the margarine and exclaiming incredulously—well, you know. (Obviously none of them were cooks…)
While doing my routine stock scans over the last few weeks, I noticed with the same level of incredulity as those celebrity margarine tasters that traditional defensive stocks, indeed whole defensive sectors, were outperforming the usual stocks that lead the pack in up trends. Cyclical sectors that usually go gangbusters in bull markets like technology, industrials, financial and energy have been lagging considerably behind the staid old defensive sectors. Let’s take a look at what is happening, dig into why, and then see if we can draw any sensible conclusions about where this could take us from here in terms of market direction.
Could These Sectors Possibly Lead the Bull Market Charge?
By definition, cyclical stocks and sectors are supposed to go up (or outperform) when the economy is strong and the stock market is in a bull phase. Counter-cyclical or defensive stocks and sectors are supposed to perform relatively better in down economic cycles and bear runs. Any analyst would see health care, utilities and consumer staples as classic defensive or counter-cyclical sectors. We can see the strong relative performance as expected with these defensive sectors in the last bear market from October 2007 to the low in March, 2009:
This chart was made using stockcharts.com’s Performance Charts and shows the performance of the various sectors RELATIVE to the S&P 500; all the sectors were down on an absolute basis during that period, but the top sectors in this chart show that they dropped less than the S&P or outperformed the index. And the leaders over that perilous time frame? Consumer staples, health care, and utilities.
We would expect the opposite to take place in the big raging bulls — these defensive stocks should swoon while the cyclical sectors should dominate. Let’s look at the two big rallies from the recent past — first, the grinding bull that followed the collapse of the internet bubble. This bull wound on from March of 2003 until October of 2007. The sectors’ performances during that time frame (again, relative to the S&P) looked like this:
Here, we can see that energy clearly led the pack, (although much of this outperformance was due to geopolitical tensions driving up crude prices) and materials followed. The laggards, as expected were health care and consumer staples.
Now let’s look at what happened from the March 2009 bottom up until the September 2012 intermediate top:
This time, the consumer discretionary led the way (XLY, labeled as Cyclicals by stockcharts.com), Financials came in second with industrials and technology following strongly. The laggards in this up cycle were the usual suspects: utilities at the bottom, along with health care and consumer staples.
This Year’s Tentative Bull – The Cyclicality Turns Upside Down for a Few Months
Since the beginning of 2013, we’ve entered the new, “post U.S. budget crisis” bull. While this bull has been persistent (the biggest pullback we’ve gotten since November of 2012 has been a mild 4.1% in the S&P), it has always had detractors that have expected a correction to come any day.
I’ve called this the “tentative bull” because the traditional sectors are no longer leading the way; in fact, they’re lagging. The defensive sectors are leading the charge, and by a wide margin. Here’s the same performance chart set out from the beginning of 2013 to this last week:
As we can see, health care has outperformed an already strong S&P by more than 10 percent! Consumer staples and utilities are not far behind. And all three of these far out distance the “also ran’s” — consumer discretionary and financials, which outperformed the S&P by rather modest amounts.
The flip side? Materials, technology, energy and industrials have all underperformed the S&P. What gives? This is incredibly non-traditional behavior for a strong bull market. And now for the final chart. I tried to quickly think of a few defensive individual stocks – the ones people turn to when times are bad. I thought of Walmart, Coca-Cola, McDonalds and Proctor & Gamble (maker of Tide and many other consumer staples) — four monster brands that tend to keep (or grow) their consumer base when times get tough. Here’s the relative performance chart of those four companies and the S&P that you would not expect to see in a strong bull:
This chart shows these defensive stocks outperforming the benchmark S&P index since the beginning of the year. Try to understand how unusual this is — three of these four stocks significantly underperformed the S&P during the bull run from March 2009 to September 2012 - McDonalds outperformed by a small amount. Similarly, the same three stocks (except McDonalds again) underperformed the S&P during the 2003 — 2007 bull run.
So What Does All Of This Mean?
When the defensive stocks lead the charge on a bull run and the “risk on” stocks under-perform, we might be getting a glimpse into the thought process of investors and traders.
The best explanation that I have heard goes something like this:
The market has had a strong run at the end of very long bull recovery. This up market has lasted more than four years. Despite the advanced age of this rally, money managers can’t afford to get cautious and lag behind the benchmark S&P by only being partially invested.
Since managers are concerned that the market is overdue for a correction, those who have to put new money to work are choosing defensive names so that their portfolios would take less of a hit when the pullback finally comes.
All of this money going into defensive names is driving up traditionally weak bull market performers and attracting money into those stocks and sectors, driving their prices up even further.
These factors have led to “risk on” or cyclical sectors underperformance. If the bulls can prolong the current up market, then money managers could once again become “true believers” in a longer-term bull and start rotating back into cyclical names — a move that could propel us even higher before that long-awaited correction comes. The Federal Reserve’s ultra-loose monetary policy (combined with the same strategy at the Bank of Japan, the European Central Bank, etc.) has only added fuel to the fire. This excess stimulus will almost certainly lead to a serious market accident — but not until the market has trapped the maximum amount of money. That will probably take another new high (or three) to get every cent back into the equities game that’s still on the sidelines for now.
Current economic and corporate earnings numbers in the U.S. aren’t helping much – they continue to be a mixed bag — some good news and some bad. Global equities markets continue to lag behind the aging bull in the U.S. (the notable exception being Japan). Emerging markets and China are especially weak. These dynamics will keep money managers driving with one foot on the gas pedal — they are trying to go as fast as they can, while the other foot is on the brake in anticipation of a sudden drop. As individual investors and traders, we need to keep alert for the signs of breakdown but we also need to remember that the U.S. indexes are still in grinding bull mode until further notice. If the 2003 — 2007 bull run taught us anything, it’s that a free-spending Fed can keep the party going long after signs point to problems on the horizon.
If you’ve found this article useful or thought provoking (or both), I’d love to hear your thoughts and feedback — just send an email to drbarton “at” vantharp.com.
P.S. — For those of you who never bought that gazillion-inch flat screen, here are the answers to the product catch phrases and their associated product:
“Melts in your mouth, not in your hand” (M&M candy)
“Breakfast of Champions” (Wheaties cereal)
“Good to the Last Drop” (Maxwell House coffee)
“Plop, Plop, Fizz, Fizz — Oh What a Relief It Is” (Alka Seltzer effervescent tablets)
“I Can’t Believe It’s Not Butter” (margarine)
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