Volatility returns

Up 100 points, down 200, up another 200, this week’s performance in the stock markets could just be getting started. We won’t know for sure until after the Fourth of July but strap in just in case. As so often happens, those sectors that led us up in the stock market, usually led us down. In this case, technology stocks have been the leaders. Some tech stocks have pulled back almost 10% over the past few weeks. However, up until now, investors have simply plowed back the profits they have made into purchasing underperforming sectors like healthcare and financials. We have been observing this rotation and writing about it for a month now, but something may have changed this week. I think the trigger was Mario Draghi, the head of Europe’s central bank. On Tuesday, speaking at the European Central Bank Forum in Portugal, President Draghi said that “The European Central Bank will have to be prudent to gradually adjust its monetary policy to the economic recovery.” On the surface, that statement seemed harmless enough, but investors chose to interpret those words to mean that monetary stimulus in Europe could be winding down. Despite denials by ECB officials the next day that Draghi did not mean any such thing stocks fell around the world, the dollar dropped, interest rates rose and the Euro spiked higher. To add fuel to the fire, both the Canadian Central Bank, as well as the Bank of England, were also rumored to be reconsidering the amount of monetary stimulus they will be adding to their economies in the future. Just the rumors alone were...

Health care bill supports markets

In a week where the overall indexes traded sideways, health care and biotech stocks bounced. It is all about market rotation. Expect that trend to continue. If you happen to have been a holder of the biotech index this week, you would have gained about 8% since last Friday. The health care index also gained (up 3%) while the S&P 500 Index remained relatively flat. The catalyst for health care was the Republican Senate’s proposed bill that would dismantle the Affordable Care Act (ACA). The bill, which is expected to be put to a vote next week, would eliminate penalties for not buying health insurance; reduce Medicaid, while capping federal spending in that area. It would also roll back many of the taxes related to the ACA. It would keep tax credits, but cut them for many low and middle income Americans. Why, you might ask, would Wall Street be overjoyed by the loss of health care insurance coverage by millions of Americans when, we the taxpayers, will end up paying for their health costs anyway? The short answer is that the proposed bill has very little in it that would impact drug pricing and Wall Street is notoriously short-term in their thinking. If you recall the presidential campaign rhetoric, both candidates promised to control drug pricing and place additional restrictions on biotech and pharmaceutical companies. As a result, over the last 2 years, there has been a dark cloud over this group of stocks. That cloud was just lifted this week. In the absence of anything else to do (remember, the summer time is usually a slow season...

Markets in pullback mode

Technology stocks continued to consolidate while the Dow made new highs and the S&P 500 Index hovered just below historical highs. Throw in the fact that the markets are notoriously slow and biased to the downside during the summer months, and you have a recipe for further consolidation. That does not necessarily mean that we will see some sharp and painful correction in stocks. My regular readers understand that the averages could simply move sideways for a month or two before resuming their upward climb. However, within those averages, individual stocks and sectors could experience much deeper declines. Take the present decline in the technology-laden NASDAQ market, or the carnage investors have experienced in energy shares. Tech stocks are presently down almost 3% from last week’s high, although several individual shares are down a great deal more than that. At some point, these pullbacks will have run their course. The oil patch has seen even greater declines as the price of oil plummets, then spikes, only to fall again. But once these areas find a bottom, something else—financials, healthcare, utilities, etc. – could be the next group to sell off. It will depend on their price level in relation to the rest of the market. This is the concept of “rotation,” which I explained in last week’s column. So while the overall averages may show little change from month-to-month, certain areas could experience substantial declines. Small cap stocks have done little all year while many other sectors have risen in price. Some traders are betting that money coming out of technology could conceivably end up in the small-cap Russell...

FOMO fuels the markets

The fear of missing out (or FOMO) has supported the stock market averages this week. Although it appeared that the indexes simply marked time, appearances can be deceiving.   We made new record highs again this week as investors piled into stocks on any sign of weakness. The fear that stocks will go ever higher fueled those who are underweighted in equities to buy, buy buy. The S&P 500 Index has reached the lower end of my target (2,443) but could easily spike to 2,475, which is at the top of my range. In bull markets, and this one certainly qualifies, I often observe traders attention move from concentrating on one set of sectors to focusing on another. Price usually dictates the move. Take the NASDAQ 100, for example, it is the large cap technology index. This index has hit record highs in 9 out of the last 11 sessions and has been higher 24 out of the last 30 market days. Other areas, such as semiconductors and large cap growth stocks have also been ‘in favor’ and are now trading at nose-bleed levels. Yet, some sectors, such as small cap stocks and financials, have been lagging the market most of the year. As the price levels between the leaders and laggards widen, traders are now willing to buy those cheaper ‘out of favor’ sectors. We call this “Sector Rotation” and this week, despite a relatively quiet market, traders were beginning to rotate into undervalued areas. If you are sharp and can afford to watch the markets day-in and day-out, you can detect these behavior patterns. There are still other...

Markets are still on a roll

Additional gains propelled stocks higher this week with all three averages closing at record highs once again. Despite the fact that more and more experts are warning of a possible fall in the averages, investors continue to pile into stocks. Should you?   The short answer is no, wait for that decline, unless you have no exposure to the stock market. That would be hard for me to believe if you have been reading my column regularly. My readers also know that the threat of a pullback hangs over the market all the time since we can expect as many as 2-3 declines in the stock market every year. The economy, however, is still growing enough, and interest rates are still low enough, to justify the present level of stock prices. Friday’s nonfarm payroll data was just another example of the underlying support that is propelling stocks skyward. The country’s official unemployment rate has dropped to 4.3%. That is a historically low number and most economists would say we are at full employment now. That’s not quite accurate, however, if you look at the “underemployment rate.” That is the number of workers who are presently working part-time, but would prefer full-time work. If you add that category of workers with those who have a full-time job, you have an overall unemployment rate of 8.4%. That is quite a bit higher than the official rate but is still down from 8.6% in April and the lowest reading of the combined employment data since June of 2007. Anecdotal evidence from several CEOs around the country over the past few weeks seems...

Markets climb higher

In the absence of any earth-shaking news, stocks tend to follow the recent trend. That trend, since the election has been up, so… The question to ask: when we can logically expect that trend to change? As readers may recall, my target for the S&P 500 Index is somewhere between 2,443 and 2,475, which I expect we will hit before the end of the second quarter. This week, we broke 2,400, regaining everything that was lost in last Wednesday’s 2% downdraft. Now, that 2,400 price level should act as a support for the bulls. “Are you still bullish?” asked one of my clients yesterday. “That depends upon your time frame,” I answered. In the short-term I am, if you consider that between now and say, the end of June, the markets could tack on another 2.5% or so. That’s not a bad return for 30-some days, and it is far better than the yield on the ten-year, U.S. Treasury Note (2. 24%). However, I recognize that the odds against further gains in the medium-term (this summer) are climbing. For example, the S&P 500 has not had a 3% drop since the August-November, 2016 time period, nor has it had a 5% decline since June, 2016. Given that we have had 16 corrections of 5% or more since the 2009 bottom, we are overdue for some kind of larger pullback. But in the meantime, the technology sector has been the stand-out winner so far this year. The FANG stocks (Facebook, Apple, Netflix and Google) have clearly been responsible for that leadership, representing about half the gains. Since a fair amount...