last Friday’s US stock movement

Last Friday the S&P 500 opened at 2436, rose to 2446, fell to 2416 and rallied at the end of the day to close little changed at 2432.  Volume was maybe 10% higher than normal.  Sounds ho-hum.

Look at Financials, Energy or Technology and the story isn’t one of a sleepy summer-like Friday.  It’s violent sector rotation instead.

According to Google Finance, the Energy sector was up by +1.4% for the day and Financials by +0.8%.  Technology fell by -2.7%.

But that understates what happened beneath the calm surface.

Oil exploration and production stocks, which have been in free fall recently, rallied by 4% or more.  Large internet-related names fell by an equal amount.  Market darling Invidia (NVDA) rose by 4% in early Friday trading, then reversed course to fall by 15%, and rallied late in the day to close “only” down by 7%+.  That came on 5x recent daily volume.

What’s going on?

Well, to state the obvious, Friday’s stock market action in the US runs counter to recent trends.  To my mind, the aggressive buying and selling are both based on relative valuation rather than any sudden change in the fundamental prospects for any of the companies whose stocks are gyrating around.  It’s an assertion by the market that no matter how grim the outlook for oil, the stocks are too cheap–and no matter how rosy the future for tech, the stocks are too expensive.

This is part and parcel of equity investing.  There’s always someone, usually with a long investment horizon, who is willing to bet against the current trend, on grounds that current price movements are being driven by too much emotion and not enough by dollars and cents.

what’s unusual

What’s unusual about last Friday, to my mind, is how sharp the division between winning and losing sub-sectors has been and how aggressively stocks have been both sold and bought.

For what it’s worth, I also think it’s odd that this should happen on a Friday. Human buyers/sellers of this size tend, in my experience, to worry about whether they can execute their plans in one day, preferring not to let the competition mull the situation over on the weekend.  But that’s a minor point.  (One could equally argue that if the buyers/sells were looking for maximum surprise, Friday would be the ideal day to act.)

If this is indeed a counter-trend rally, meaning that after a period of valuation adjustment the prior trend will reassert itself (which is what I think), the most important investment question is how long–and how severe–the pro-energy, anti-tech rotation will be.

My experience is that it’s never just one day and that a counter-trend movement can run for a month.  On the other hand, this doesn’t look like the typical work of traditional human portfolio managers.  It looks to me more like trading done by computers.  If that’s correct, I’d imagine the buying/selling will cut deep and be over relatively quickly.  But that’s just a guess.  And I know my tendency in situations like this is to act too soon.

For myself, I’ve been thinking for some time that US oil exploration companies have been battered down too much.  As for tech, I still think it will be the most important sector for this year.  So I’m happy to use this weakness to rearrange my overall holdings, nibbling at the fallen tech names and offloading a couple of REITS I own that I think are fully valued.



the Trump rally and its aftermath (so far)

the Trump rally

From the surprise election of Donald Trump as president through late December 2016, the S&P 500 rose by 7.3%.  What was, to my mind, much more impressive, though less remarked on, was the 14% gain of the US$ vs the ¥ over that period and its 7% rise against the €.

the aftermath

Since the beginning of 2017, the S&P 500 has tacked on another +4.9%.  However, as the charts on my Keeping Score page show, Trump-related sectors (Materials, Industrials, Financials, Energy) have lagged badly.  The dollar has reversed course as well, losing about half its late-2016 gains against both the yen and euro.

How so?

Where to from here?

the S&P

The happy picture of late 2016 was that having one party control both Congress and the administration, and with a maverick president unwilling to tolerate government dysfunction, gridlock in Washington would end.  Tax reform and infrastructure spending would top the agenda.

The reality so far, however, is that discord within the Republican Party plus the President’s surprisingly limited grasp of the relevant economic and political issues have resulted in continuing inaction.  The latest pothole is Mr. Trump’s refusal to release his tax returns–that would reveal what he personally has to gain from the tax changes he is proposing.

On the other hand, disappointment about the potential for US profit advances generated by constructive fiscal policy has been offset by surprisingly strong growth indications from Continental Europe and, to a lesser extent, from China.

This is why equity investors in the US have shifted their interest away from Trump stocks and toward multinationals, world-leading tech stocks and beneficiaries of demographic change.

the dollar

The case for dollar strength has been based on the idea that new fiscal stimulus emanating from Washington would allow the Fed to raise interest rates at a faster clip this year than previously anticipated.  Washington’s continuing ineptness, however, is giving fixed income and currency investors second thoughts.  Hence, the dollar’s reversal of form.


Absent a reversal of form in Washington that permits substantial corporate tax reform, it’s hard for me to argue that the S&P is going up.  Yes, we probably get some support from a slower interest rate increase program by the Fed, as well as from continuing grass-roots political action that threatens recalcitrant legislators with replacement in the next election.  The dollar probably slides a bit, as well–a plus for the 50% or so of S&P earnings sourced abroad.  But sideways is both the most likely and the best I think ws can hope for.  Secular growth themes probably continue to predominate, with beneficiaries of fiscal stimulation lagging.

Having written that, I still think shale oil is interesting   …and the contrarian in me says that at some point there will be a valuation case for things like shipping and basic materials.  On the latter, I don’t think there’s any need to do more than nibble right now, though.



Jim Paulsen: lower lows, but not by much

Jim Paulsen, equity strategist for Wells Capital Management, an arm of Wells Fargo, gave an interview on CNBC yesterday.  It’s well worth listening to.

His main points:

–the stock market decline we’ve seen since November is all about adjustment to lower future earnings growth prospects.  This is being caused by the resumption of “normal” growth as the bounceback from deep recession is completed.  Another aspect of the return to normal is the economic drag from gradual end to extraordinary monetary stimulus, at least in the US.

In Mr. Paulsen’s view, the S&P 500 can trade at 16x trailing earnings in this new environment, not the 19x it was at two months ago.

–we may have seen the lows for the year last Wednesday at midday (1812 on the S&P 500).  More likely, the market will revisit those lows in the near future.  It will break below 1800 on the S&P, creating a fear-filled selling climax.

–assuming, as he does, that the S&P will end the year flat, i.e. around the 2044 where it closed 2015, a buyer at yesterday’s close would have a 9% return (11% dividends) from holding the index by yearend.  A buyer at 1800 would have a compelling 14% (16%) return.  11% might be enough to attract buyers; 16% surely will be.

–2017 will be a stronger year for earnings growth than 2015, implying that the market will rise further as/when it begins to discount next year’s earnings growth.

–the current selloff will trigger a market leadership change.  The new stars will likely be industrials, small-caps and foreign stocks.

a change in market leadership?

Very often, when the stock market makes a significant low and begins to rebound, a change in market leadership also takes place.  A new group of individual stocks and sectors emerges as the strongest performers as the market rises, sometimes emerging from areas least expected by conventional wisdom.  At the same time, at least some of the prior market stars are left by the wayside.  In my experience, the left-behind phenomenon occurs much more frequently.

It isn’t 100% clear that the recent market decline has been significant enough to be one of these transformative moments, although the drop of around 15% in the S&P from its intraday high last November to (what we hope was) the intraday low on Wednesday is the largest fall we’ve seen in some years. Still, it doesn’t cost anything to observe and analyze stock price movements to try to uncover new trends.  And if there were one time we should be extra-sensitive to deviations from the prior norm, this would be it.

(Monthly performance records of the S&P 500 by sector going back for years can be found on my Keeping Score page.)

Has the market really bottomed?  The intraday plunge in New York trading on Wednesday, followed by sharp rises around the world on Thursday and more so far today is the typical bottoming/rebound pattern.  So my guess is Yes.  Typically, the market will repeat the pattern we saw in the S&P last August-September–that is, a rally for several weeks, followed by a return to the vicinity of the prior lows and then a stronger rebound.

Will Energy and Materials lead on the way up?  I find that hard to believe, but both sectors have been drubbed over the past year or more.

Will Healthcare and Consumer discretionary lag?  That wouldn’t be my first instinct, either.  But the important thing isn’t what I think, it’s what the performance numbers begin to say in the coming weeks.

Other possibilities?

My guess is that we’ll find more separation of companies on the Millennials vs. Baby Boomers theme.   We may also see a sharper distinction between companies born out of WWII and whose managements have resisted structural change vs. those firms, both old and new, who have embraced the internet, mobile and the cloud.  Small may begin to outperform large.



timing the stock market

In its simplest form, timing the stock market means trying to figure out when stocks are either very expensive or very cheap and acting on your conclusion by selling stocks at the high points, holding cash for a while and backing up the truck to buy them again when prices are at their lows.

Two problems with market timing:

–it’s risky.  Historically the bulk of the positive returns from owning stocks occur on about 10% of the days.  Missing them can be devastating.

–it’s difficult to do.  In fact, in almost thirty years in the business I’ve never met a successful market timer.  I’ve encounter lots of unsuccessful ones, though.

There are professionals who are good at calling market tops.  Some are good at calling bottoms.  But I don’t know anyone who can do both.  More typical is the portfolio manager who “helps” his clients by raising a ton of cash on his view that the market is toppy, is psychologically unable to admit his mistake as stocks continue to rise and whose successor gets the task of cleaning up the resulting performance mess.


I have no idea where the strong negative emotion driving stocks lower globally is coming from.  So I think it’s best to stay on the sidelines until the craziness burns itself out.

Still, I noticed a couple of things about yesterday’s trading that suggest a bottom may be approaching.

–the S&P 500 broke through support at 1865 or so at the open and in short order found itself at the next support level of around 1815 at lunchtime.  The market made an immediate reversal and closed right around (just below) the former support.

The next support below 1815 is at 1870 or so.  We’ll see in the next few days whether the S&P can either recover above 1865 or hold above 1815.

–some stocks that I don’t hold but which are on my screen went crazy yesterday.

SCTY fell by -12% in the morning but closed up by almost +9% for the day.  That’s a 20% intraday swing.

LC fell by -9% in the morning but closed up by +8% for the day.  That’s a +17% intraday swing.

Yes, these are speculative stocks.  And they’ve been pummeled during the market downdraft.  But wild intraday swings like this are most often found at market turning points.

What to do?

I’m starting to comb through my portfolio for stocks that have held up well during the downturn to date and thinking about switching them for more interesting stocks that have been slammed over the past couple of months.  I’m not doing anything yet.  And I’m in no way contemplating making basic changes in portfolio structure.  But there may be an opportunity developing to upgrade at reasonable prices.




a market of stocks or an overall stock market?

my worry

This is the question I was writing about a few days ago.

The outstanding characteristic of the US stock market vs. other national markets during my career has been that Wall Street has been, almost uniquely, dominated by stock pickers.  While political or macroeconomic concerns occasionally arise, the focus of the vast majority of stock market participants has been on the merits (or lack of them) of individual stocks.

Many veteran stock pickers on the sell side have either retired or been laid off over the past several years, however, and institutional pension money allocated to active investing has increasingly been funneled to trading-oriented hedge funds or other “alternative” investment vehicles in a so-far vain attempt to close the gap between the assets they have on hand and the minimum they need to meet their present and future obligations.

The result of this change has been an increasing influence on stock prices by computers that react to news of all sorts as it is published and by short-term human traders sensitive to macroeconomic trends but with (to me) surprisingly little knowledge of the ins and outs of individual companies or industries.

My worry has been that–as has happened in other countries–the macro woes of sectors like Energy and Materials, or perhaps the demise of the post-WWII industrial corporate structure, overwhelm the attractions of even large micro pockets of strength in, say, IT.

last Friday

My worries have no basis in fact, at least so far, if last Friday’s trade is any indication.

The S&P 500 was up by 1.1%, the IT-heavy NASDAQ by 2.3%.  However, consider the performance of the following companies that reported earnings before the open:

Microsoft         +10.0%

Alphabet (aka Google)          +7.7%

Amazon          +6.2%

athenahealth   (a weak performer before Friday)      +27.5%.


Compare that with:

VF          -12.9%

Skechers          -31.6&

Pandora Media          -35.6%%.


Two things stand out to me:

–most of these reactions are extreme, suggesting that the market is reacting to the news rather than anticipating it, and

–the market is very willing to differentiate sharply between individual winners and losers.


My conclusion:  we as individuals can still ply our stock-selecting trade.   The reward for finding superior companies, however, may come all at once, and later than we have been used to in the past.