While the S&P 500 and Dow Jones Industrial Average race to new record-highs, there’s still a sense of caution and vulnerability on the side of investors towards the stock markets here in the U.S.
In fact, a study I read in Bloomberg estimated that around 47% of stocks listed on the NASDAQ stock market are currently in a technical bear stock market, down 20% or more from the highs. On the small-cap Russell 2000, the story is even worse with more than 40% in a bear stock market. And the study shows that the S&P 500 had a mere eight percent of stocks in a technical bear stock market.
There’s even talk of the S&P 500 reaching 2,300 by the year’s end, according to some of the optimistic bulls on Wall Street. I feel it’s pure fantasy that the index will rise by another 15% by year-end.
The reality is that the stock market is stalling. Without any fresh and inviting reasons to buy, I sense the stock market risk is quite high.
An alternative would be to invest in a foreign market, and while I like China, Israel is fast becoming the favorite for growth investors. Israel has produced some top companies in the past, especially in the technology and medical devices sectors.
Israeli stocks are the third most listed stocks on the U.S. stock markets. (China is second.) As a country, Israel may be small, but an excellent investment opportunity can usually be found there. Moreover, the risk for fraud is much lower than with U.S.-listed Chinese stocks. I can’t say that I have ever heard of fraudulent … Read More
I would be the first to admit that on occasion, I have a craving for donuts, fries, and junk food. Luckily, it’s not that often, and I manage to stick to a fitness program.
Yet overindulgence and rising obesity levels have become a crisis not only in America, but in many countries around the world. It seems as though as people get wealthier, they also become fatter.
I recently read that about a third of the world is now considered overweight, based on a study by Christopher Murray of the Institute for Health Metrics and Evaluation at the University of Washington. (Source: Cheng, M., “30 percent of world is now fat, no country immune,” Yahoo! Finance, May 29, 2014.) The research suggests that Americans are the fattest people in the world, accounting for a whopping 13% of the total. This shouldn’t be a surprise, given the amount of fast food people tend to eat.
Now, while the rising obesity levels are clearly an issue for the healthcare sector down the road, there are companies that are in the business of helping people shed the pounds—this is a sector you can play as an investment opportunity at this time.
A small-cap stock that is worth a look as an investment opportunity in this area is Medifast, Inc. (NYSE/MED), which has a share price of $31.14 and a market cap of $409 million. Medifast is a producer and seller of weight and disease management products, along with consumable health and diet products. The company’s product line is sold under the Medifast brand and includes meal replacements and vitamins for those trying to … Read More
You can’t deny it: there are outright signs of stress on the key stock indices. We see investors are worried, and they just don’t like risk. We see huge selling in the growth stocks, with names like Amazon.com, Inc. (NASDAQ/AMZN) and Twitter, Inc. (NYSE/TWTR); they are witnessing a huge sell-off and are now in bear market territory. The biotechnology sector is getting slammed—investors are hitting the bid and running for the exit.
With all this happening, one question comes to mind: what happens next? Growth stocks can act as a leading indicator of what’s next for the markets. Are key stock indices setting up for a huge market sell-off ahead?
Sadly, as this happens, we are hearing a significant increase in the noise. The bulls say this pullback should be used to get into the sold-off companies again. The bears argue that key stock indices are going to shed more gains. Beware; your portfolio might get hurt.
When it comes to investing for the long run, it is critical that investors try to minimize the noise and look at the long term.
With this said, over the past few years, the key stock indices have increased significantly. 2013 was another stellar year. Key stock indices like the S&P 500 increased more than 30%. Companies that are getting sold off—for example, Amazon.com—increased roughly 50%. The NASDAQ biotechnology sector that’s plunging lower now had increased by more than 85% in 2013.
Going forward, it doesn’t look like the year 2014 will be anything like 2013. I expect the key stock indices to move sideways—trading in a range. These ranges may break to … Read More
Mother’s Day is on Sunday, and it’s not too late to begin thinking about how to celebrate and reward good old mom for all those years of managing the household.
Of course, what always comes to mind are flowers, a special dinner, or perhaps a show or gift to display your appreciation.
So whether it’s from you to your mom or for your wife from your kids, it’s not a day to forget—trust me, you’ll be in the dog house if you do. (I know that’s what would happen in my case!)
Given that, it doesn’t hurt to browse around for something for your portfolio while your mind is in Mother’s Day shopping mode. Here are three examples of the stocks you could consider as an investment opportunity that could benefit from this day, based on my stock analysis.
First of all, what woman doesn’t want flowers? A decent investment opportunity, 1-800-FLOWERS.COM, Inc. (NASDAQ/FLWS) is worth a look. The online operator sells market-fresh flowers along with plants, gift baskets, gourmet foods, confections, candles, balloons, and stuffed animals. I like 1-800-FLOWERS.COM as an investment opportunity.
Chart courtesy of www.StockCharts.com
In the fiscal third quarter (ended March 30, 2014), 1-800-FLOWERS.COM reported quarterly revenues of $179.6 million, which was down from $191.6 million in the year-earlier fiscal third quarter. The company attributed the decline to the winter conditions and the shift of Easter to the fiscal fourth quarter. The quarter saw the addition of 675,000 new customers; 1.6 million customers ordered something during the quarter, according to the company.
For that special dinner to show your appreciation, you might consider taking your mom … Read More
When I’m looking at the screens each day, I notice there’s some selling capitulation occurring that makes me think back to 2000, when the technology stocks imploded.
Now, while I doubt we are seeing a repeat of 14 years ago, you have to wonder about the mad dash to the exits for many of the high-momentum technology stocks along with small-cap stocks. The small-caps are under threat, with the Russell 2000 down nearly eight percent in 2014 so far and close to five percent in April alone. Watch as the index is just above its 200-day moving average (MA).
Chart courtesy of www.StockCharts.com
As I said last week, the fact that the NASDAQ and Russell 2000 have failed to recover their respective 50-day MAs is a red flag, based on my technical analysis. Moreover, the presence of a possible bearish head-and-shoulders formation on the NASDAQ chart is concerning for technology stocks.
The lack of any leadership from technology stocks now, which was so prevalent in 2013, has also hurt the broader stock market.
On the charts, only the S&P 500 is positive in 2014, with a slight advance. All of the key stock indices were negative in April—a month that has historically been positive.
To make matters worse, we are heading into traditionally the worst six-month period for the stock market, from May to October, so it’s not going to get easier anytime soon.
The fact that numerous technology stocks have produced some strong earnings results is encouraging, but the lack of strong follow-through buying is a concern and suggests some exhaustion towards technology stocks.
We also have the uncertainty … Read More
The chase for high-beta stocks appears to be fading at this juncture, as we are seeing a shift in the risk profile to lower-beta and more conservative large-cap stocks in the stock market.
After the staggering gains made by technology and small-cap stocks in 2013, it’s time to take a prudent approach to the stock market and refrain from chasing risk at this time.
We are seeing a move to consumer staples stocks that tend to fare reasonably well in both up and down stock markets.
While I favor small-cap stocks in an up stock market, the current tension in the stock market makes it dangerous to pursue risk. This is a time you need to be in defensive stocks.
The big banks, consumer staples, and industrial sectors look decent for those wanting to continue to invest at this time. Momentum and growth should be avoided for now.
If you are looking for a singular stock market play that offers diversity and a defensive approach, take a look at time-tested General Electric Company (NYSE/GE), which has offered investors steady returns in the majority of periods since its beginnings in 1892.
General Electric (GE) is precisely what you want in this type of market. It’s extremely well diversified across many industries and geographical areas around the world.
The company prides itself on producing steady results to shareholders. Its management strategy is to hire CEOs for 20-year time spans that allow for stability.
GE is the poster child for consistency in corporate America.
The company isn’t going to make you rich in a short period of time in the stock market, but … Read More
The stock market appears to be getting somewhat top-heavy. Scanning through my screens, I am quite amazed to find that the majority of S&P 500 stocks are well above their respective 200-day moving averages, which makes opportunities much more difficult to come by for the average investor who might look at their portfolio once a week or month.
But the buying in the stock market has still largely been with the technology, growth, and small-cap stocks, due to the higher potential to make quick money versus investing in blue chips or industrial companies.
In 2013, we saw staggering upside moves in some of the momentum stocks, such as Google Inc. (NASDAQ/GOOG), priceline.com Incorporated (NASDAQ/PCLN), Netflix, Inc. (NASDAQ/NFLX), and Chipotle Mexican Grill, Inc. (NYSE/CMG). These are the top players in their respective areas.
But that was then. Now, we are seeing a renewed interest in some of the safer names in the stock market, which is why the Dow Jones and S&P 500 outperformed in March.
My view is that while there will still be money to be made in some of the more speculative and momentum plays in the stock market, we could also see a pause for investors to digest the gains made.
Cyclical stocks, or those companies that swing with the economy, are still worth a look, but should the economic renewal stall and jobs creation dry up, it might be time to look elsewhere. Here I’m talking about those sectors such as auto, furniture, retail, travel, and restaurants.
Everyone is spending when all is good and people are making money on the stock market, but spending will … Read More
“I think the stock market is getting into the overbought territory. Gold is due for a pullback. To be honest, I don’t see many opportunities out there other than bitcoins.” These were the words of wisdom from my good old friend Mr. Speculator. While most have forgotten about the virtual currency, Mr. Speculator thinks there’s an opportunity.
His reasoning behind this shows he is very naïve. He said, “The bitcoin prices have come down significantly from their highs. Buy low.”
It seems as if Mr. Speculator has forgotten one of the most basic lessons of investing.
Sure, bitcoin prices have declined—in fact, the word “collapsed” should be used. Just a few months ago, one bitcoin could be purchased for more than $1,100. Now, the price hovers below $700.00.
If you are considering bitcoins to be a good investment opportunity, you have to know what is really happening; there are too many concerns surrounding the currency, and investors should be aware of them.
One of the biggest concerns, among many, is that one of the main exchanges where bitcoins could be bought and sold, called Mt. Gox, filed for bankruptcy. Before the exchange filed for bankruptcy, there were complaints about users not being able to withdraw money. With this, there is also evidence of fraudulent activity. (Source: Finley, K., “Bitcoin Exchange Mt. Gox Files for U.S. Bankruptcy as Death Spiral Continues,” Wired, March 10, 2014.) This is sending out a wave of fear.
Another concern is that usage of the virtual currency is being questioned. Will bitcoin ever get the currency status?
Consider this: a company called Balanced Energy LLC, based … Read More
By Sasha Cekerevac for Daily Gains Letter | Mar 14, 2014
There is something going on right now in the copper market that should alarm you. Over the past week, the price of copper has plunged, recently hitting a four-year low.
Why should this matter?
Most investors and analysts are placing bets that economic growth is about to re-accelerate globally. Never before has the world been so interlinked, so we must pay attention to what is occurring internationally.
Copper is an important part of the potential for economic growth, not just because it is used in building and construction, but because it is also a major factor in the Chinese lending market, which is now showing severe strain leading to a potential debt crisis.
Remember, the last financial emergency was led by a debt crisis brought on by a housing bubble that eventually popped. High levels of debt creating a bubble are always dangerous, as the hangover is quite severe.
How does this impact economic growth for us here in America?
To begin with, we all know that the U.S. is doing relatively better than other parts of the world, but we are not exactly running at full speed. Any slowdown in economic growth—especially with a country as large as China—that is brought on by a debt crisis in that nation could severely impact our economy.
In China, the lending market is quite different than in North America, and firms have to rely on what’s called shadow banking.
Many firms in China have trouble borrowing, so they buy copper and use it as collateral. We are not talking about a small amount of money, as a shadow banking system in China … Read More
There’s more to renewable energy than just wind and sun. And thank goodness for that, because our interest and investment in traditional renewable energy sources like solar panels and wind farms seems to be on the decline.
The amount spent on deals to finance clean energy and efficiency projects tanked 12% in 2013 to $254 billion—a quicker pace than the 9.1% drop in 2012 from a record level of $318 billion in 2011. (Source: Goossens, E., “Clean Energy Support Falls Again to $254 Billion in 2013,” Bloomberg, January 15, 2014.)
The drop in investment and interest in traditional renewable energy sources is a setback when you consider annual investments in renewable energy sources need to double to $500 billion by the end of the decade—and then double again to $1.0 trillion by 2030. That represents a huge clean energy investment gap.
Decreased interest in some renewable energy sources also comes on the heels of the discovery of abundant sources of non-renewable energy, like shale oil. And since we don’t really like change all that much and prefer the path of least resistance, our dependence on non-renewable energy sources like oil is not going to diminish anytime soon. That said, the scales will eventually tip in favor of renewable energy sources.
With that in mind, when it comes to your investments, some analysts recommend allocating five percent of your retirement portfolio to clean energy.
After years of silence and disappointing investors, optimism on the heels of a number of large contracts are helping companies that make fuel cells reward really, really patient investors.
Plug Power Inc. (NASDAQ/PLUG) got the fuel cell … Read More
Since 2009, the U.S. stock market has become one of the hottest plays. Investors have poured in money and have reaped the rewards. In the last five years, many stocks have doubled or more. Looking at all this, one must really question if the stock market can go at this pace for a long period of time.
If you look back, you will notice that whenever there has been too much bullish sentiment, the stock market usually comes down. As it stands, we see stock advisors calling for 2014 to be a year similar to 2013 when the stock market increased significantly.
I don’t agree with the mainstream opinion. I have said this before in these pages: the stock market will most likely not show as robust a performance this year as it did last year—and it may even fall as we head further into the year.
For the stock market to continue to increase, you want to see momentum on the side of the buyers. When I look at the charts, I see nothing but indecision and exhaustion. It appears investors are struggling to take the prices higher. Look at the chart below. I will use the sell-off we saw in January and early February as an example.
Chart courtesy of www.StockCharts.com
One of the indicators of a healthy stock market that I look at is how many days it takes to get back to or break above the market’s previous highs after a sell-off. If the market moves slowly, then you can judge it as not as strong. If it goes back up quickly, then the … Read More
One of the investment strategies discussed in the mainstream these days is to add exchange-traded funds (ETFs) to your portfolio. It is said that when you do just that, your portfolio has lower risks and you are well diversified.
For investors who are not as advanced, when it comes to investing; this investment strategy makes sense. For those who are advanced, they shouldn’t fall for this investment strategy; they may be better off going the other way—buying individual stocks instead.
Let me explain…
Between March of 2009—when the bull market run started—until February of this year, if you bought the most famous ETF for your portfolio—that is SPDR S&P 500 (NYSEArca/SPY), which tracks the S&P 500—your returns would be more than 185%. Plus, there would be dividends. Including dividends, your returns would be just over 200%.
But, saying the very least, you could have done better.
If instead of buying the SPY at the time when markets were presenting investors with an opportunity of a lifetime you bought a company from the S&P 500 like General Electric Company (NYSE/GE), your profits would be upwards of 300%. This is including the dividends you would have received.
With all this said, let me make one thing very clear; I am not opposed to adding ETFs to a portfolio. Rather, I believe investors can get better portfolio returns if they are confident enough in making their investment decisions and buying individual companies instead of sticking to indexed investing.
In 2009, stock markets were very uncertain. With companies like GE, there were fears that it may go bankrupt. Buying at that time wouldn’t have … Read More
Nothing helps create volatility on the stock market like the threat of war. And just a few short days after the close of the bloated $52.0-billion behemoth in Sochi, Russia has embraced its ne’er-do-well Olympic spirit and invaded the Ukraine. Or, according to Putin, “pro-Russian soldiers” have simply moved into the Ukraine to defend Russian interests.
With a growing threat of war/retaliation on the horizon, investors have been pulling their money from riskier assets, like stocks—sending global financial markets reeling. Crude oil and gold prices, on the other hand, have been on the rebound.
While it seems utterly crass to deconstruct the potential for war down to economics, the fact remains—a stand-off or sanctions could both disrupt gas supplies to the European Union and send U.S. crude oil prices higher.
For starters, any issues in the Ukraine could disrupt the flow of natural gas supplies from Russia to the European Union. That’s because the European Union gets about a third of its crude oil and natural gas supply (and a quarter of its coal) from Russia, mostly piped through the Ukraine. Russia, the world’s biggest crude oil producer, generated 10.9 million barrels a day in 2013 and currently exports close to 5.5 million barrels of crude oil per day.
Since the end of the Cold War, no one really worried about relying on Russia for crude oil and coal. All of that has changed. While the notion of war is remote, it’s still on the table. Nations far removed from Russia and Ukraine might push for economic sanctions, just as the U.S. has done, threatening visa bans, asset freezes, and … Read More
Key stock indices were going through a rough patch from the beginning of the year until early February. Now, they seem to have some momentum to the upside. With this, investors are asking what kind of upside potential is possible. Will the key stock indices continue to increase and break above their previous highs, or are we due for another sell-off like the one we saw earlier, and only then will we see some good buying points?
Let me begin by saying what I have said many times in these pages before: 2013 was a stellar year for key stock indices, but now they need to breathe a little. The key stock indices may go above their all-time highs made at the end of last year, but the move isn’t going to be as robust. You might see a slow, dreadful move to the upside.
If this scenario does play out—key stock indices moving slowly and breaking above their all-time highs—the fundamentals are suggesting it won’t be a significant move.
Companies on the key stock indices are warning about their corporate earnings. For example, 66 companies on the S&P 500 have issued negative guidance about their corporate earnings in the first quarter of this year. (Source: “Slightly larger cuts to earnings estimates than average at mid-point of Q1 2014,” FactSet, February 14, 2014.) Corporate earnings estimates by analysts are also being slashed. Mind you, we are just in the second month of the quarter.
Major names on the key stock indices are reporting horrible sales. Consider Caterpillar Inc. (NYSE/CAT), a major industrial goods manufacturer, for example. The company reported its … Read More
While the U.S. economy is hardly on solid footing, the fact remains that as the world’s biggest and most influential economy, the U.S. doesn’t have to be running optimally to keep the global economy chugging along. Though, it would be nice if the U.S. economy would gain sustainable traction. Until then, we will have to be content with its glacial pace of recovery.
And it is slow. In 2012, gross domestic product (GDP) growth was 2.8% and in 2013, it slowed to just 1.9%. Things are expected to get better over the next two years. U.S. GDP growth is forecast to hit 2.8% in 2014 and an even three percent in 2015.
The rest of the world will be playing catch-up. Well, save for the Chinese economy, which has a 2014 growth forecast of 7.5%. GDP growth in the eurozone picked up 0.3% in the fourth quarter of 2013—the third quarter of growth since the end of an 18-month recession. (Source: “Eurozone GDP growth gathers speed,” BBC News web site, February 14, 2014.)
The International Monetary Fund (IMF) forecasts that India’s GDP growth will hit 4.6% this year and climb to 5.4% in 2015. Brazil recently revised its 2014 GDP growth rate from 3.8% to 2.5%—which is still higher than analysts’ GDP growth forecasts of 1.79%. (Sources: Mishra, A.R., “IMF says India needs more rate hikes to bring inflation down,” Livemint.com, The Wall Street Journal, February 20, 2014; “Brazil cuts 2014 budget, GDP estimate,” Buenos Aires Herald web site, February 21, 2014.)
For investors who have been waiting for a broadly based global recovery, these are encouraging signs. It also … Read More
Two things have been consistent this winter: bad weather and bad economic news. And both just keep on rolling. With spring just around the corner, the weather will clear up; the U.S. economic news, on the other hand, might not be so lucky.
Over the course of the last week or so, a raft of weak economic news and earnings has welcomed the markets.
For starters, a higher number of Americans filed applications for unemployment benefits for the week ended February 8. Jobless claims climbed by 8,000 to 339,000; the four-week moving average for new claims increased to 336,750 from 333,250.
For the week ended February 15, applications improved—though barely—by 3,000 to 336,000, which was less than what was forecast. The four-week moving average (which is considered a less volatile figure), increased by 1,750 to 338,500.
And then there’s more bad economic news on the home front. Last week, the National Association of Home Builders (NAHB) said that its monthly housing sentiment index tanked from 56 in January to 46 in February, the largest monthly drop in history. The negative sentiment goes hand in hand with the two-percent drop in applications for U.S. home mortgages for the first week of February. Mortgage application activity continued its nascent drop in the second week of February, falling 4.1% to 380.9.
Further weakness is being felt in U.S. manufacturing. Economic news from both the New York and Philadelphia indices disappointed. The New York manufacturing gauge slowed in February after hitting a 20-month high in January. Manufacturing conditions slipped to 4.48 in February from 12.51 a month before. Analysts had forecast a much more … Read More
By Sasha Cekerevac for Daily Gains Letter | Feb 21, 2014
This past weekend, a friend of mine made a statement that there must be a large amount of economic growth coming shortly because of the booming stock market, driven by investor sentiment.
As I told him, the two are not necessarily tied together.
Over the past few months, we have heard about how economic growth is about to accelerate here in America, and this has helped drive investor sentiment in the stock market higher. However, I think there are many questions that need to be answered before we can assume economic growth will reach escape velocity, and investor sentiment is heavily contaminated with a large addiction to monetary policy.
Some of the data has improved; however, many other reports only lead to murkier water.
For example, we all know that economic growth requires the consumer to be active, since consumption is approximately 3/4 of the U.S. economy. But for the holiday season, many retail companies issued disappointing results, even though there were signs that consumer spending was beginning to pick up. This is an interesting data point: during the fourth quarter of 2013, consumer debt increased by $241 billion from the third quarter, the biggest jump in debt since 2007. (Source: “Quarterly report on household debt and credit,” Federal Reserve Bank of New York web site, last accessed February 19, 2014.)
Should investor sentiment view this increase in consumer debt as a positive or negative for economic growth?
A large amount of the debt increase came from the automobile industry, but what really worries me that could impact future economic growth is the combination of higher debt with weaker retail … Read More
For an economy that relies on consumer spending to fuel the vast majority of its economic growth, ongoing weak retail sector sales and increased jobless claims cannot be part of the equation. But they are. And have been.
In January, U.S. retail sector sales fell by 0.4%—the most since June 2012. Economists had predicted that January’s retail sector sales would be unchanged in January after falling by a revised 0.1% in December. (Source: “Advance Monthly Sales for Retail and Food Services January 2014,” U.S. Census Bureau, web site, February 13, 2014.)
January retail sector sales, excluding automobiles, gasoline stations, and restaurants, showed the worst year-over-year growth since 2009. And with the harsh winter weather, January’s sales reflect the sometimes unpredictable, cyclical nature of our spending, from discretionary (e.g., cars) to non-discretionary (e.g., heating).
At the same time, more Americans filed applications for unemployment benefits for the week ended February 8. Jobless claims climbed by 8,000 to 339,000; the four-week moving average for new claims increased to 336,750 from 333,250. Many economists continue to blame the cold weather for both weak retail sector sales and increased jobless claims. (Source: “Unemployment Insurance Weekly Claims Report,” United States Department of Labor web site, February 13, 2014.)
Fortunately, there is a silver lining to all of this. They suggest we’ll start to see an acceleration in hiring and retail sector sales in the spring and summer seasons—meaning they have written off the entire first quarter of the year, a quarter most economists initially predicted would be bullish. Myself and the financial editors here at Daily Gains Letter, on the other hand, have been warning … Read More
Federal Reserve Chair Janet Yellen has confirmed what most already knew. The recovery in the U.S. jobs market is far from complete. Yellen noted that the unemployment rate has improved since the Federal Reserve initiated its last round of quantitative easing in late 2012, falling from 8.1% to 6.6%. Curiously, in 2013, the U.S. economy grew just two percent.
That said, against the backdrop of a so-called improving U.S. economy, the numbers of the long-term unemployed and part-time workers are far too high. In fact, 3.6 million Americans, or 35.8% of the country’s unemployed, fall under the “long-term unemployed” umbrella—that is, those who have been out of work for more than 27 weeks. The underemployment rate (which includes those who have part-time jobs but want full-time jobs and those who have given up looking for work) remains stubbornly high at 12.7%.
The improving unemployment numbers come on the heels of two straight months of weak jobs numbers. In January, economists were expecting the U.S. to add 180,000 new jobs to the U.S. economy; instead, just 113,000 new jobs were added. In December, economists were projecting 200,000 new jobs would be added—instead, the number was an anemic 74,000.
For the head of the Federal Reserve, this translates into more money being dumped into the bond market ($65.0 billion per month) and a continuation of artificially low interest rates.
Once again, bad news for Main Street is good news for Wall Street. After Yellen’s speech, the S&P 500, NYSE, and NASDAQ responded by surging higher. Again, the Federal Reserve’s ongoing bond buying program and open-ended artificially low interest rate environment is great … Read More
At the beginning of January, I was optimistic that 2014 would deliver some good results to the stock market. I suggested that small-cap stocks would also continue to return profits to investors after a wonderful 2013 as the economy continued to show progress.
But after a disastrous January, in which the small-cap Russell 2000 attracted the most selling and was down more than nine percent from its 2013 record-high, concerns surfaced.
At this stage last year, small-cap stocks were blossoming with the Russell 2000 up more than eight percent by February.
Now there are concerns that small-cap stocks will face a rough ride this year. My view is that I would be inclined to buy this group on market weakness, as I still sense some of the top gains are yet to emerge from small-cap stocks; albeit, you need to be more selective when investing than you may have been in 2013.
In my view, continued economic renewal will drive small-cap stocks higher, as these companies tend to be able to react quicker to a changing economy.
We are already seeing some downside buying in small-cap stocks, as the Russell 2000 has narrowed its loss to one percent in February and is hoping for a return to positive territory.
The thing to remember is that while small-cap stocks tend to decline at a faster rate than the broader market, they also tend to rise faster when the market rallies.
The chart of the Russell 2000 below shows the downside break below the upward trendline that has been in place for some time. We saw some support and a subsequent rally. … Read More
Has the stock market rebounded? Some seem to think so. After recording the worst month in more than a year and the first monthly loss since August, some analysts think the worst is behind us and February will be a winner.
What further evidence do the bulls need than to point to the numbers! After falling more than three percent in January, the S&P 500 is up 0.75%; the NYSE is up a little more than 0.50%; the NASDAQ is up roughly 0.75%; and the Dow Jones Industrial Average is up around 0.50%. Not a spectacular display of strength—but enough to buoy up some investors.
But the euphoria may be short-lived. While stocks are holding up right now, there are more than enough warning signs (technical, economic, and statistical) that are pointing to a correction.
For starters, February is the second-worst-performing month for the S&P 500 and Dow Jones Industrial Average so far, and it’s the fourth-weakest month for the NASDAQ. Plus, according to historical data, February tends to perform even worse when January is negative. Since 1971, when January ended on a negative, the S&P 500 extended its losses into February 72% of the time—falling an average 2.4%. For the Dow Jones Industrial Average it ends down 65% of the time and 57% of the time the NASDAQ ends down, too.
But the stock markets are only as strong as the stocks that make them—so statistics on their own are a little short-sighted. Every quarter since the beginning of 2013, more and more S&P 500-listed companies are revising their quarterly earnings lower. During the first quarter of 2013, 78% … Read More
While most astute investors would point to a weak U.S. economy as the reason for the recent lackluster U.S. employment data, economists, in their infinite wisdom, point to Mother Nature. She seems to shoulder a lot of the economic blame in this country.
In January, the U.S. economy added just 113,000 new jobs, far fewer than the expected 180,000 jobs. Freezing winter weather is being blamed for the weak U.S. unemployment data. This is the second straight month of disappointing jobs data from the U.S. Department of Labor.
Last month, the U.S. economy added just 74,000 jobs—far, far below the forecasted 200,000 jobs. The back-to-back weak employment numbers continue to fuel fears that the so-called U.S. economic recovery might be stalling…if one could ever really say the U.S. economy took off.
The new unemployment data shows that 10.2 million Americans in the U.S. economy have work. While the number of people who have been out of work for more than 27 weeks declined by more than 200,000, the number was probably impacted by the 1.7 million Americans who lost their extended federal unemployment benefits at the end of December.
Last Thursday, attempts to revive a program aimed at extending unemployment benefits by three months for the long-term unemployed failed, being supported by just 59 of the 60 senators needed to pass the motion. At the end of the day, in this U.S. economy, 3.6 million Americans, or 35.8% of the unemployed, are stuck in long-term unemployment limbo.
And they might be stuck there for a long time. A recent experiment conducted by a visiting scholar at the Boston Fed found … Read More
The theme since 2010 has been very simple: the U.S. economy is witnessing economic growth. As a result of this, the stock market increased and broke above its previous highs made in 2007. Investor optimism soared, and those who were bearish saw their stock portfolio disappear.
As the new year, 2014, began, the theme became a little more complex: the U.S. economy is going through a period of economic growth, but it’s becoming questionable. The question asked by investors these days: is the U.S. economy headed for economic slowdown, and is the stock market—which has provided investors with great returns—about to see another downturn?
The economic data that suggested the U.S. economy is growing has started to suggest this may not be the case anymore. For example, after the financial crisis, the unemployment rate in the U.S. economy declined. It meant more people were getting jobs and they had money to spend—the kind of jobs created and if they made any impact is still up for debate. In December, we heard that only 75,000 jobs were added to the U.S. economy, and in January, this number was only 113,000. (Source: “The Employment Situation,” Bureau of Labor Statistics, February 7, 2014.) The number of jobs added to the U.S. economy has missed the market estimate by a huge margin for two months in a row, and the growth compared to the early part of 2013 isn’t very impressive.
The gross domestic product (GDP) growth rate of the U.S. economy doesn’t look so impressive, either. We have created a table to show how it has been declining. Look below:… Read More
There’s uncertainty on the stock market. Troubles are coming from the emerging markets, and they are causing investors to panic and sell their stocks. We see they are scared. But as this is happening, there’s a trade in the making, and those investors who have raised some cash (as I’ve been suggesting my readers do) and are looking to park their money somewhere safer than stocks can profit from this opportunity.
The trade I’m talking about is the trade that’s happening in U.S. bonds and gold bullion—some call this phenomenon a “flight to safety.” I call it a potential opportunity.
We know bonds and gold bullion are one of those asset classes where investors rush to when the risks on the stock market increase. This is something we are seeing now, and it could continue for some time.
In the following chart, I have plotted the prices of U.S. bonds (red line), gold bullion (black line), and the S&P 500 (green line). Take a look at the circled area, which shows the movement out of stocks.
Chart courtesy of www.StockCharts.com
Since the beginning of the year, U.S. bonds and gold bullion prices have increased in value, while the stocks have fallen. We have seen this relationship before as well. A prime example of this is the stock market sell-off in 2009; we saw investors rush to gold bullion and bonds then in hopes of finding safety.
It’s not too late for investors to consider taking advantage of this shift by looking at exchange-traded funds (ETFs), like iShares 20+ Year Treasury Bond (NYSEArca/TLT). Through this ETF, investors can invest in long-term … Read More
The long-expected hit to the emerging markets is finally upon us. The fact that the emerging markets are taking a beating isn’t a total surprise; on the other hand, everyone running for the exits is.
But as physics proves, for every action there’s an equal and opposite reaction—nothing can escape physics; not even Wall Street or the emerging markets.
First, income-starved investors poured money into the emerging markets to take advantage of higher interest rates. Then, after the Federal Reserve said it would begin tapering its bond purchasing program, the money began to pour out of the emerging markets in earnest.
In a nearsighted effort to combat the slide in emerging markets’ currencies, central banks have been raising their interest rates. The Turkish central bank has taken drastic measures to entice investors to return—on January 29 the Turkish government lifted its overnight lending rate from 7.75% to an eye-watering 12% and its overnight borrowing rate from 3.5% to eight percent. The South African central bank raised its interest rate for the first time in almost six years. And the Russian ruble could be next.
This suggests that the underlying danger in the emerging markets isn’t their currencies per se, but the way the central banks are reacting to the slouching currencies. Instead of lowering rates to boost their economies, the central banks have been raising interest rates to prop up currencies.
This could be especially dangerous when you consider that emerging markets make up half of the world’s gross domestic product (GDP). If emerging markets try to follow the U.S. and raise interest rates, it could cripple their own economies … Read More
By Sasha Cekerevac for Daily Gains Letter | Feb 7, 2014
Well, that didn’t take long! Just a few weeks ago, I wrote an article stating that investors should begin to worry about the lofty level of the stock market. Since that time, the S&P 500 has dropped by more than five percent in less than two weeks.
This market correction won’t be a surprise to my readers, as I have been suggesting investment strategies that can help prepare your portfolio for a large downswing in the market for some time now.
When I wrote the article in late January, the S&P 500 was surging, even though the preliminary Thomson Reuters/University of Michigan index of consumer sentiment dropped month-over-month. Since then, we have seen additional data coming from China showing that its economy is beginning to slow.
The Markit/HSBC China Manufacturing Purchasing Managers’ Index (PMI) for January was 49.6, much weaker than expected. (A PMI data point below 50 denotes a contraction in activity.) While many analysts have been expecting China to begin accelerating, this recent data is a dose of reality, as manufacturing jobs in China dropped for the third consecutive month. (Source: “HSBC China Manufacturing PMI,” Markit Economics, January 30, 2014.)
I know what you’re thinking; “Why should investors in the S&P 500 care about what happens in China?” A market correction doesn’t occur based on a single event. When you’re trying to develop investment strategies, especially if you are considering the potential for a market correction in a large index, such as the S&P 500, you have to take many factors into account, as if you’re working on a jigsaw puzzle.
First ask yourself, what are the positive … Read More
“What should you do when the house isn’t in order?”
A good friend of mine asked this question back in 2011. At that time, key stock indices were plunging lower due to issues regarding the U.S. debt ceiling. There was uncertainty, and many wondered what would happen next. I remember this question now because the key stock indices nowadays are falling due to troubles in the emerging markets and there seems to be panic—similar to what we were experiencing when I first heard this question.
When key stock indices are declining, instead of panicking and selling every holding in their portfolio, investors have to be strategic and instead think with an open mind and a long-term perspective.
The first step investors should take is to see where the troubles are coming from and if they are exposed to it at all. For example, these days, we see problems in the emerging markets are causing panic. If investors have a massive percentage of their portfolio invested in the emerging markets, then they should simply reduce their exposure. If they continue to hold their positions, and the markets continue to decline further, their losses will get bigger and it will be much harder to recover. If investors witnessed a drawdown of 25% in their portfolio, it will have to go up by more than 33% for them to just break even. Plus, reducing exposure not only protects investors from potential loss, but it also increases their cash position.
The second step investors should take is to exercise extra caution when key stock indices are falling. Investors should carefully screen the news and … Read More
There are many indicators that can give us an idea about where key stock indices may be headed. It may seem obvious, but always remember that nothing is certain until it happens. As I say quite often in these pages, trying to predict the exact top and bottom on key stock indices can significantly damage your portfolio in the case that the markets move in the opposite direction.
When I am trying to figure out what the next move will be by the key stock indices, I look at investor sentiment; I look at where investors are placing their money and what kind of assets they are buying. For example, when investors think the risks on key stock indices are increasing, they go towards safer stocks—big-cap companies may be one example. On the other hand, if investors think the key stock indices are moving to the up side, they move into stocks that provide better-than-market returns.
One indicator of investor sentiment that I look at is the relationship between the Utilities Select Sector SPDR (NYSEArca/XLU) exchange-traded fund (ETF) and the Morgan Stanley Cyclical Index. The XLU tracks utilities companies that are considered safer by investors because their products or services are needed regardless of economic conditions, like electricity providers, for example. On the flipside, the Morgan Stanley Cyclical Index tracks cyclical stocks, which are the stocks that move with the markets and are considered riskier assets, like furniture retailers, for example—they are dependent on how the economy is doing overall.
With this in mind, please take a look at the chart below. It shows the movement in the XLU and … Read More
By Sasha Cekerevac for Daily Gains Letter | Jan 31, 2014
One of the more common themes that I keep reading about these days is the strength of U.S. economic growth. It’s important to get at least some understanding of the potential for economic growth, as this will impact your investment strategy.
Recent data is definitely making me ask the question: just how strong is the level of economic growth in America?
We all know that this holiday season was much weaker than expected for retail companies. Considering that consumer spending fuels the majority of economic growth in America, this is certainly not a positive environment for that sector—but that shouldn’t be a real surprise to my readers, as I have recommended an investment strategy that has avoided retail stocks for months.
If economic growth is weak in retailing, are there any bright spots for larger goods?
According to the U.S. Department of Commerce, the latest advance report on durable goods was quite disappointing. New orders for durable goods during the month of December dropped 4.3%, core durable goods orders during December dropped 1.6%, and excluding defense, new orders were down 3.7%. (Source: U.S. Department of Commerce, January 28, 2014.)
Another worrisome data point in the report showed that the inventory level of manufactured goods in December was up 0.8%, the highest total amount since this data series was published and also the eighth monthly increase over the last nine months.
How should you formulate an investment strategy with this information in mind?
Economic growth depends on a continued increase in consumption and production. We saw consumers pull back over the holiday season, which is clearly not a positive sign for … Read More
Just a few days ago, I received another call from my good old friend Mr. Speculator. He was worried. He has been long on the stock market since the beginning of the year, but sadly, stocks have come down a bit. He asked, “Do you think there’s more downside on the stock market? Or is this the correction everyone was talking about?” Mr. Speculator bought exchange-traded funds (ETFs) that provide him leverage; he added, “My losses are adding up. Should I sell or wait?”
Mr. Speculator isn’t the only one who is asking this question since the key stock indices started to come down. I hear this question being asked all around. January is supposedly a good month for stocks, but so far, this is simply not the case. The S&P 500 is down roughly three percent. Investors are asking whether or not the returns on stocks are going to be horrible this year.
Looking at the charts and assessing the sentiment, it appears reality is slowly coming back to the stock market. Take a look at the following chart of the S&P 500.
Chart courtesy of www.StockCharts.com
Looking from a technical analysis point of view and taking the S&P 500 as an indicator of the entire stock market, there are a few developments that investors need to know.
First of all, since the beginning of the year, the volume on the S&P 500 has been increasing. This is interesting to note, because it suggests investors are selling into weakness. In addition to this, we see that the S&P 500 has broken below the 1,800 level and has moved below … Read More
Yesterday, I wrote about how a raft of weak first-quarter results could trip up the S&P 500 and put a dent in its unblemished bull run. My theory: the S&P 500’s stellar performance in 2013 was a result of financial engineering (share buybacks and cost-cutting) and the Federal Reserve’s monetary policy, not strong revenue and earnings growth.
As a result, the S&P 500 and other key stock indices are overbought and overpriced, meaning stocks will have a tough time justifying their lofty valuations if first-quarter results fail to wow investors. And odds are good that they will disappoint. A record 94% of S&P 500 reporting companies revised their fourth-quarter guidance lower.
That is, unless investors fail to realize earnings projections were lowered and reward stocks for beating barely there expectations—it’s not impossible. For evidence, I point to the action in the S&P 500 in 2013.
With stocks on the S&P 500 being overpriced, it’s getting more and more difficult to find equities that will actually perform well based on legitimate metrics, like revenues, earnings, and cash. For the most part, it seems investors punish those stocks that don’t perform as well as expected by simply not lifting their share prices higher. As a result, it’s become increasingly difficult to build a balanced portfolio with both growth and value stocks—especially when you consider the fact that analysts expect the S&P 500 to grow just six percent in 2014. Analysts might be more optimistic about the S&P 500 long-term, but that’s of little solace for investors hoping to actually make money this year.
Investors on the lookout for value stocks may need … Read More
An interesting conversation on investments surfaced recently at a dinner party with some friends. The topic was whether it was better to buy large-cap dividend-paying stocks, such as General Electric Company (NYSE/GE) and The Procter & Gamble Company (NYSE/PG), or look at smaller dividend-paying companies.
Of course, I spontaneously said it depended on a host of factors, including the risk appetite of the investor and the economy.
When the economy is growing, and especially as it emerges from a recession like we saw it 2008, it would be advantageous to stock up with smaller dividend-paying companies. The reason is because small companies tend to fare better when adjusting out of a slow period than larger companies, which take much more time to strategize and put a plan into effect.
Another way of looking at it is that it’s easier to steer a smaller boat versus a larger ship in calm waters, but when it gets rough out there, I would rather stay on a bigger ship. The same analogy applies to the question of small-cap versus big-cap stocks.
Now, as far as dividends are concerned, the most important thing is the underlying strength of the company and its previous and forward ability to pay dividends. You want to buy dividend-paying companies that have a valid and sustainable business—no fad stocks here.
Another major monetary benefit of small dividend-paying stocks is the much superior upside price appreciation potential that’s often associated with small-cap stocks. So while companies like General Electric and Procter & Gamble will consistently do well over decades, in the short run, adding some small dividend-paying stocks can help … Read More
Last week, North America was plunged into a deep freeze when a “polar vortex” (an extreme weather event marked by record-breaking cold temperatures and winter weather systems caused by an Arctic cold front) swept across the continent, sending the coldest air in 20 years into major population centers in both the United States and Canada.
Areas in the Midwest and most of Canada were hit with weather normally reserved for the North Pole. On January 5, 2014, the temperature in Green Bay, Wisconsin was a brisk -18 degrees Fahrenheit (°F). During the polar vortex, the temperatures in Atlanta fell to just 6°F, while those vacationing in Tampa were treated to temperatures as low as 24°F.
In the lead-up to the polar vortex, spot U.S. energy prices soared. Natural gas for next-day delivery for one contract in New York jumped to a record $90.00 per million British thermal units (BTU) on January 6; that represents a 660% increase from the close of the previous week and 20-times more than the natural gas benchmark futures prices. Normal winter natural gas prices can be found in the high teens or low $20.00s. (Source: Meyer, G., “Freeze drives up US gas and power prices,” The Financial Times, January 6, 2014.)
The harsh, cold weather forced many Americans to burn more gas to keep warm. And since roughly half of all U.S. households use natural gas for heating (accounting for 21% of U.S. natural gas consumption), there was concern that natural gas suppliers might not be able to service every customer. (Source: “Frequently Asked Questions,” U.S. Energy Information Administration web site, last accessed January 14, … Read More
Are emerging markets worth looking at in 2014? Not too long ago, emerging market equities witnessed a pullback—when the taper talk came on the horizon. As a result, investors are asking if this has now created some value in these markets.
Before going into any details, investors have to keep one very important aspect of investing in mind: cheap doesn’t mean good value. Investors shouldn’t be interpreting falling prices as “value coming back to the market.” In some cases, this may be true, but in other cases, if the prices are falling, there’s a reason.
You see, emerging markets are going through some troubles, and as a consequence, their equity prices are a little vulnerable.
For example, India, the third-largest economy in Asia, reported a decline of 9.6% in 2013 auto sales. This was the first decline in auto sales since 2002. This well-known emerging market is struggling with high inflation and low economic growth—or a period commonly referred to as “stagflation.” In the fiscal year 2013, India’s economic growth was the lowest in almost 10 years, and inflation is running at 10%. (Source: Choudhury, S., “Indian Car Sales Slump for First Time in a Decade,” Wall Street Journal, January 9, 2014.)
China, another major emerging market, has been seeing its fair share of trouble as well. This year the country is expected to post growth that’s nothing like its historical average. In December, the HSBC China Manufacturing Purchasing Managers’ Index (PMI)—a gauge of manufacturing activity in the country—declined to a three-month low. (Source: “HSBC Purchasing Managers’ Index Press Release,” Markit Economics web site, January 2, 2014.)
Brazil, a common … Read More
The year 2013 was a stellar year for stocks. The key stock indices have seen record increases: the S&P 500, which showed its best performance since 1997, increased by almost 30%; the Dow Jones Industrial Average saw a similar increase; and the NASDAQ Composite Index performed even better, ending the year with a return of more than 35%.
Looking at these numbers, one must really ask how their portfolio has done. If your portfolio had similar returns—well done! If it lagged, here’s something to note: hedge funds returned only 7.4% for the year. They lagged by almost 23% compared to the broader market return—the most since 2005. (Source: Bit, K., “Hedge Funds Trail Stocks for Fifth Year With 7.4% Return,” Bloomberg, January 8, 2014.)
Two key stocks that beat the returns of key stock indices and the returns given by the hedge funds many times over this past year were Gray Television, Inc. (NYSE/GTN) and Tesla Motors, Inc. (NASDAQ/TSLA).
Gray Television, Inc.
In 2013, this stock opened at $2.28. On the last trading day of the year, it closed at $14.88. If you held Gray Television stock in your portfolio for the entire year, your profits per share would have been $12.60, or just over 552%. (Source: StockCharts.com, last accessed January 9, 2014.) This return is similar to beating the hedge funds return by almost 75 times and beating the returns posted by the S&P 500 by 18 times. Below is the chart that shows this stock’s precise move.
Chart courtesy of www.StockCharts.com
Tesla Motors, Inc.
Tesla Motors opened at $35.00 in 2013. On the last trading day of the … Read More
Trading for 2014 has begun. In 2013, we saw massive moves on the key stock indices—something we have only seen a few times. For example, the S&P 500 moved up by almost 30%, and the NASDAQ Composite increased by more than 35%. Those who were long saw their portfolio grow, and those who went against the key stock indices probably had to question their strategy and re-allocate the capital.
You can see for yourself in the chart below: key stock indices such as the S&P 500 maintained an upward trajectory throughout the year—and without any major hiccups.
Chart courtesy of www.StockCharts.com
The average return on the S&P 500 between 1970 and 2012 was 8.2%; on the Dow Jones Industrial Average, it was 7.9%; and on the NASDAQ Composite, it was just slightly more than 13%. (Source: “Historical Price Data,” StockCharts.com, last accessed January 2, 2013.)
Sadly, these numbers only indicate past performance. With the beginning of the new year, investors have one main question in mind: where are the key stock indices going to go in 2014? Will we see a decline or are we in for another stellar year?
The year 2014, I believe, is going to be an interesting year for stock investors. The rally in the key stock indices that started in 2009 continues to march forward. As this is happening, the fundamentals that act as fuel for the stock market rally are becoming anemic. This should be noted, because without fundamentals becoming stronger, key stock indices can only go so far.
For instance, on the surface, the U.S. gross domestic product (GDP) looks better than before, … Read More