Stocks managed to squeeze out a small gain on the week after some better than expected economic data gave the market hope a recession would be avoided.
The green finish breaks a streak of weakness that had gripped the market for the last two months. The Dow was down 4.25% in August and just over 5% in September, historically the weakest month for stocks. The losses were fueled by fear that the economy was slipping back into a recession. There was also significant deterioration in the Euro zone as Greece and a number of European banks moved closer to the abyss. So with fear fueling the action, investors sold a lot of stocks and bought a lot of bonds.
Some segments performed better than others. Energy stocks took a beating. Consumer staples and utilities did much better. Anyone long bonds saw nice gains as investors shifted into conservative assets to avoid volatility.
But the first few days of October have offered a different picture.
Tuesday afternoon, the second trading day of the month, stocks saw a huge intra-day rally. The Dow jumped 400 points in the last 30 minutes of the session. The S&P500 was up 35 points. It came in the nick of time, because the S&P500 was at the brink of another meltdown, trading at 1775 and testing its 3-month low at 1172 for a third time. A break through that key level would have been bad for the technicals and sentiment.
But the market clearly saw it as a buying opportunity, scooping up stocks that have been beaten into the ground over the last two months and few weeks. Take a look at the big bounce in the chart below, where each bar represents one hour.
Beyond the key level on the chart, the market was also comforted by a renewed pledge from the EU financial ministers to support the Euro and Euro Union (haven’t we heard this before?). This is like watching two kangaroos hopped up on meth trying to play ping pong. Good look figuring out what will happen in the long run, but for the time being it went a long way to comfort the market.
Also on the fundamental side, Q3 earnings are set to kick off this week. Corporate earnings have been a bright spot in the shaky recovery of the last two years. Make no doubt about it, the private sector is very strong right now. Margins are at a record, balance sheets are insulated and earnings are at a record. That’s right, the S&P500 is back to peak earnings from 2007 while trading at a 30% discount. That offers very compelling value.
Another strong season of earnings could really juice the market as the Street continues to focus on value.
So that is the big question for anyone sitting on cash.
Do you look for a rally into the end of the year on good valuations and earnings or do you play it safe because the Euro zone story and domestic growth issues linger?
It’s a tough call.
As it stands, the averages are still stuck in the middle of the wide trading range that has been in play for the last two months. A break above or below this area could lead the way for the next sustained move. Take a look at the daily chart below.
Updates:
CF Industry Holdings (CF) was at the front of the pack with a 9% gain on the week. CF took a pretty serious beating in September, falling from an all-time high of $192 to a short-term low around $120. But even with shares rebounding to $134, this stock looks so insanely undervalued it’s not even funny, with a forward P/E of just 6.4X.
Kansas City Southern (KSU) was also on the move, adding 9% on the week as some stronger than expected economic data had the Street shifting back into cyclicals and transports. KSU has held up well in the recent sell off, falling from an all-time high of $63 to Friday’s close of $55.
We saw a nice rebound from Baker Hughes (BHI), adding 7% on the week as higher energy prices fueled interest in energy stocks. The gains are much welcomed, because energy stocks have been one of the worst performing sectors over the last two months as fear over growth had investors shifting into more conservatives segments of the market. But all the while, earnings and estimates have held mostly steady. So when shares are down 40%-50%, that creates an incredibly long-term buying opportunity.
Moving into technology, security specialist Check Point Software Technologies (CHKP) gained 6% on the week while Apple (AAPL) fell 3%. CHKP has held up well in the tough market, falling from $62 to $56 as Internet and enterprise security issues remain top priorities. But Apple has been a different story, with founder Steve Jobs death weighing on shares. There’s no doubt that’s a blow to the company and its status on the Street, but for the time being, and for the next few years, no other company comes close to dominating multiple markets the way Apple does. So for the time being AAPL Is still the top pick in technology.
We saw some solid movement from one of our financial stocks, with The Blackstone Group (BX) adding 6% on the week in spite of a 4% loss on Friday. Blackstone is a great way to gain exposure to the financial sector without having to own one of the big banks that continue to suffer from legal issues and shaky balance sheets. Similar to what we are seeing in many other stocks right now, the valuation on BX in insane, trading at just 6X forward earnings. So even though shares have struggled over the last few months, there is reason to be optimistic.
That’s all for this week. Stocks are off to a good start in October, so let’s look for that trend to continue. Until next time, here is an article discussing 12 lessons we can all learn from Apple founder Steve Jobs. Enjoy.
12 Lesson to Learn from Steve Jobs
Your Investment Partner,
Mike
