*I’m excited to let everyone know that I launched my new website this week. I created a new online marketing strategy and my website is a key part of that. So please feel free to take a look. And if you want to follow me on Twitter, LinkedIn or Facebook you will see links. Enjoy!
https://vodickagroup.com/vgroup/
Weekly Update-April 6, 2012
Stocks were already having a bad week before this morning’s disappointing jobs report, coming in well short of expectations and reigniting fears about economic weakness. Even though the regular stock market was closed for Good Friday, stock index futures all closed in the red, with the Dow Jones down 1.14%, the S&P 500 off 1.15% and the NASDAQ dropping 2%.
Even though the averages did log a technical breakout over the last few weeks with a new multi-year high, we have still mostly been dealing with a range trade. That’s because the new high wasn’t particularly strong or aggressive. While that was still a bullish signal, this week looks like it could be a key reversal.
On Tuesday and Wednesday, the averages pulled back sharply from that new high, trading all the way to the bottom of the recent channel at Dow 13,000. Take a look at the pullback below.
Dow- 5 Day
5-Day Chart
Dow- 1 Year
Longer term, this has been a simple liquidity rally. Check out this unbelievable grind higher for the last 6 months off the October low. The market has been pricing in tons of liquidity from the central banks, sending asset prices higher.
Dow 1-Year Chart
Liquidity Killers
But just this week, we saw two very key liquidity-killing events hit the wire. The first is Europe, where Spain and its bond yields are signaling deep distress. We also heard from the Fed, with 8 out of 10 voting governors saying they see no need for QE3.
Those two events right there are huge. We know the Fed is accommodative and that if the market needs its support it will be there, but at the very least, it gave a little shock to the 100% QE3 camp. The Fed was basically saying, hey, it’s not a done deal, so you better hedge your bets.
But the bigger event is Spain. To anyone who has been paying attention to the Euro zone story this is hardly any kind of news flash. It’s all the same game over there. Countries running huge deficits, bonds yields spiking, everyone covering up and lying about how bad things really are. Spain is signaling deep distress right now, but right behind Spain you’ve got Italy and Portugal.
Think about how badly Greece rocked the global economy and multiple that by about 30 or 50? It’s a pointless exercise, because it would never come to that. The Euro zone and Germany in particular barely made it through bailing out Greece? Do you think anyone (politicians, bankers, central planners) involved in that ridiculous process wants to live through that again?
Of course not. So just as quickly as the marker felt comforted by a resolution for Greece, the Euro zone story is right back on the table.
Buy beyond the Euro zone and Fed, this market is looking at some serious challenges.
Land Mines Abound
On the earnings front, we’ve seen sharp equity gains over the last three month with little movement in earnings estimates. Those estimates are being curbed by higher gasoline expenses, pushing the valuation picture to the higher end of its 10-year median.
Beyond estimates and valuation, China continues to slow, posting its fifth straight month weaker manufacturing data. With the Euro zone attempting to administer austerity, is it any surprise that global GDP and China are slowing?
The Middle East actually seems to be cooling a bit lately, but maybe that’s just because some of these other stories have taken precedence. But regardless, political uncertainty in the Middle East is a huge threat to stocks so the situation has to be monitored closely.
And as long as we’re on a roll, the US just received a credit downgrade as fresh talk of the debt ceiling emerges. When Congress raised the debt ceiling last year, it was supposed to be good until 2013. But turns out Uncle Sam is running a bit hot, because the new target date is September. Ya, that’s sort of a long way’s away, but the fact that its already getting talked about goes to show just how important it is.
And this all comes in the face of some very serious Q1 gains. The best first quarter for the S&P 500 in 14 years.
A lot of people have been looking for a pullback, and with a string of bad news fueling the bears, the stage could be set for a correction.
Let’s talk about some stocks.
Updates:
It wouldn’t be a week in stocks without Apple, Inc. (AAPL), at the top of the charts with a 3.91% gain. The valuation picture still looks pretty solid for Apple in spite of the recent string of gains. In fact, the recent round of analyst upgrades include a $1,000 price target. Who knows if that will happen but for the time Apple has some very solid momentum.
CF Industry Holdings, Inc. (CF) was also in the winner’s column, also adding 3.9% to trade within 3% of its all-time high just above $195.
But with the market weak, there was more red than green.
Gold was a notable loser on the Fed hawkish language, with Double Gold (DGP) down 3.71%. Market Vectors Junior Miners (GDXJ) was also weak, falling 7% for a new 52-week low at $22.39. The miners in general have underperformed physical gold, and that has been apparent in GDXJ for the last year, where shares have failed to rally on higher gold prices. This is a good way to get diversified exposure to the gold miners, but it’s been tough to own GDXJ for the last year.
Energy was also weak, with Cimarex Energy Co (XEC) down 6% on the week. Energy was very hot in the rally, so if the market gets weak a lot of shorter term players will be looking to take profit. And energy always gets hit hard in a sell off anyway.
Sending us out on a good note, VeriFone Systems (PAY) also bucked the bearish trend and came though with a solid 2.3% gain on an upgrade from Goldman. Electronic financial transactions are in a secular bull, so and this is a great way to play it.
That’s all for this week, but until next time, here is a quick article on the weak jobs report from this morning. Jobs were making the market feel good, so this disappointing report will definitely weigh on sentiment.
Stock Futures Sink on Weak Jobs Report
Your Investment Partner,
Mike
Michael Vodicka is the president and founder of the Vodicka Group, Inc., a Registered Investment Advisor (RIA). He specialized in trading fixed-income derivatives at the Chicago Board of Trade before spending five years managing equity portfolios for a private investment research company.
Michael graduated from the University of Kansas with a degree in business communications and is registered with the State of Illinois and the SEC (Securities and Exchange Commission) as a Licensed Investment Advisor (Series 65)
