Skip to main content

May 24, 2014 – Weekend Market Comment

May 24, 2014 - The S&P 500 is up 1.2 percent in the past two days. I know, big deal, but believe it or not it's the best two-day rally since April 15-16. Pretty meager, eh? That's why I called 2014 "the Mehh year" this morning. Up one day, down the next, and mostly in a very narrow trading range, even on an intraday basis. And in the last month, volume has been lighter than usual on most days.

So what's the rest of the summer going to look like? Remember what has been holding back markets this year: 1) choppy economic data, partly weather induced, 2) emerging market concerns, and 3) global tensions, largely Ukraine-Russia.  But there is some reason for optimism. Russia/Ukraine tensions have eased for the moment.

Friday, the iShares Emerging Market ETF (EEM) is closed at its highest level since October. It's up 3.1 percent this year, outperforming the S&P 500's 2.5 percent gain. That brings us back to the choppy economic data. Earnings were hardly inspiring for the first quarter, up roughly 3.3 percent. But even here there is some reason for optimism: Q2 revisions have been fairly mild, with the exception of a few retailers. So what? That is a sign that CEOs are not anticipating a disaster. And don't make light of a two-day rally. The S&P is sitting right near its historic closing high of 1897. The point:  risk is back on for now because markets go higher when there is nothing holding them back and right now no news is good news. I would expect a rotation to more risky offshore ventures and to a bounce in the Nasdaq and smaller cap issues in the USA. 

Remember This
This is a bull market, yes it is a bit long in the tooth at 5 years running but it is also following on the heals of the worst sell off in our lifetime. Here is the first chart I always look at... the long term bull and bear lines, you can learn about in my school posting here.

(as always click any graphic to see it bigger)

Dark green is above red, you should be long, then you must decide on a ratio of high risk and safe low volatility and cash. Part of what controls the mix is your age and risk tolerance. 

For example if you followed me in a few weeks ago... you bought more IPL and more Tripadvisor. both are great companies and both have fool proof ways to make money. Tripadvisor has the better future but it will be bumpy. But on this last round both equities are up almost 10% in two weeks, of course that easy in Tripadvisor but you know you are getting a gift with IPL no pipeline stock can do that forever. 

So what is the market seeing that is bringing back risk.... well of course it is all in the charts. 

First off the NYSE continues to climb unabated as we can see in the NYSE market forces:

We also see a bounce coming in the number of NYSE  stocks over their 50 day moving average.

The aggressive defensive graph is showing a clear bounce in to risk on.

And we are in the midst of a green arrow signal, admittedly a little lack luster, but that's part of the first quarter Mehhh market. 

On Balance volume still is keeping up, but this indicator can turn on a dime. 

Probably the best sign of a return to US Risk on trade is the hopeful bottoming pattern showing up in the NASDAQ summation index. If this is for real expect Biotech and smaller cap firms to do well.

A Cautionary Tail
OK it would not be me if I did not say that things are not all perfect, but what I see as a problem is mostly in the camp of too good to last. We can see that we have an off combination here. First off the primary sell indicator is at rock bottom. If you are a optimist you will say it is all about to turn around, if your a pessimist (or a revision to the mean trader) this is giving you a funny feeling ...

Then you look at the VIX and you say... hmmm 11? That looks way to optimistic. 

But signals that things are too good can go on a long time, the saying is, the market can be irrational longer than you can be solvent. So I would not bet against this market.

What Works Now
Well a few things are working well right now, Transportation, Energy, Biotech, Internet and Financials. If you are going Risk On buy that list if you are wary of the market then look to financials and Canadian pipelines. 

Transportation firms according to the DOW theory always leads a recovery. CP rail has certainly been a market darling.

If the US recovery is stronger than expected look at Idia's offshore outsourcing giant Cognizant Technology

Iron Mountain is a great company that got hit hard when it's tax strategy got a thumbs down from the IRS. Time to forget that and enjoy the fat profits they make.

Emerging markets lead in a recovery and you might have followed me in to Brazil's top power company CIG

Biotech/Pharmaceutical is a risk on area, leaders in this space include Alexion and Celgene

Energy has done very well so far but can it continue. Here is Gibson Energy and a funny play on energy ... oil field trailer company Horizon North Logistics. 

If you really want to be out on a could bet the US consumer is coming back to life and play Under Armour. 

Lower Risk Ideas
So you look at the VIX graph and worry the party might be over sooner than people expect? OK consider financials, they tend to sell off less at the end of a cycle. Here is Bank of New York Mellon, Visa and Spain's number one bank Santander.

Read My Disclaimer Here