Stock Market Analysis
Conclusions: The market didn’t know what to do with Spring and decided to go into hibernation. The Dow slumped 2.3% and the small cap Russell 2000 tanked 3.6%. We saw 2,241 stocks fall compared to 975 that advanced. In spite of the sell-off, almost twice as many stocks hit new highs as hit new lows.
Every sector fell except Utilities. Especially hit hard were Healthcare and Financials. What is amazing is that Utilities are up over 10% this year with no other sector even coming close. Of course, bonds have been rallying this year and Utilities are often seen as a substitute for bonds.
The setback really comes as no surprise. We have been warning of a correction for weeks. Last month I said, “we may be on the Highway to the Danger Zone.” We also noted that speculation had gripped the market and could be seen in the strength of growth stocks and IPOs (Initial Public Offerings). This isn’t unusual when the market approaches a peak and we have suggested lowering equity levels for weeks. In fact, this week on CNBC I suggested we were approaching a hairpin curve and needed to downshift by selling stocks and buying bonds. We have just written a Special Study titled “Shifting Gears,” which is available upon request.
April is usually among the best months for stocks but so far stocks have fallen. The unweighted average of stocks on the NYSE is down almost 2% and more stocks are declining than advancing. Who is taking the hit the hardest? Generally, it has been the frothiest securities, the ones we were warning about. IPOs, according to Bloomberg, are down over 5% this month. Furthermore, big momentum is in big trouble. We reviewed those stocks with a market capitalization over $500 million that had doubled in the 12 months ending March 31st. How has April treated these major winners? On average this group is down over 9%.
Our indicators have been helpful this year and they are still negative. As always, we’d like to see the indicators improve as the market heads lower but they haven’t so far. We are likely to see a normal correction, which should be at least 10% and could be more than 20%. The good news is that our longer term indicators are positive, so a healthy correction could lead to a good buying opportunity. We would continue to keep lower equity levels.
Barry R. James, CFA, CIC
Bond Market Analysis
Conclusions: As we’ve been saying for weeks, the bond market was likely to rally when stocks tumbled. This was true last week. All bond sectors except high yields advanced and longer Term U.S. Treasury bonds climbed over 1.9%. High quality Corporate bonds also rose nicely. With stocks falling in price this year, it is good to see long term treasury bonds returning 8.8%.
Surprisingly, the advance in bonds has come on the heels of rising commodity prices. Oil is up over 4% and gold almost 10%. However, drought conditions have pushed up corn and wheat prices by over 10%. Of course, beef prices have been soaring as well. It does seem that we are having a reversal of last year when stocks were the winners and everything else headed lower.
Inflation remains muted, still below 2%, whether you use PPI, CPI or PCE. Economic reports were marginally positive last week, likely keeping the Fed on pace for tapering Quantitative Easing. Small business confidence rose and job openings grew. Jobless claims plunged and the University of Michigan confidence numbers rose slightly. As we’ve pointed out previously, in the last five years, the best time to own bonds was when the Fed ceased Quantitative Easing.
Our bond indicators have been positive all year and remain so today. We have previously suggested extending durations, however, we would pause for a moment. Bonds may give us another buying opportunity and with patience we might obtain better prices. We would maintain somewhat higher durations where appropriate for accounts.
Barry R. James, CFA, CIC
