What Do the Schizophrenic Markets Want?

While I am not a psychiatrist, I am tempted to diagnose our current market as borderline schizophrenic because it has shown a tendency to go up on bad news but also often go down on good news.

To be sure, there was a fair amount of good news last week, with retail sales beating their numbers handily, the New York Manufacturing Index doing the same, and Chairman Bernanke declaring that the recession is very likely over. So as one might expect, the market was up for the week. However, by the time most of this good news was made public (on Thursday), the market went down.

Most of the large companies reporting last week — e.g., FedEx (FDX), Oracle (ORCL), and Best Buy (BBY) — failed to meet consensus estimates. Most of the bad news came out late in the week, and on Friday, the market was — you guessed it — up.

Then Monday morning brought some more bad news. Lennar (LEN) missed its earnings badly, and even missed its revenue estimates by a whopping 7%. Also, leading indicators were up 0.6%, versus an expected 0.7% and a revised July number of 0.9%.

Perhaps also related to a poor overseas market overnight, the market opened sharply down Monday, with all sectors down more than 1%, except Health Care. But as has been the case so often lately, the market fought off the ravages and retraced much of that loss by the close, with the S&P500 down -3.6 (much less than 1%).

Sector Performance: No Crystal Ball. It doesn’t help us very much to turn to our sector data for help. Financials seemed to bear the biggest brunt of the bad news, with several more major bank failures and the President’s speech threatening Wall Street over its exorbitant bonuses. With this backdrop of unpleasantness, our schizophrenic market considered Financials (up 4.2% for the week) the best buy of all the sectors.

Industrials, which legitimately had fairly good news for the week, was in second place, up 4%. At the bottom came Telecom (+0.6%) and Health Care (+1%).

Despite relatively little new news Monday, the sector map has flip-flopped. Health Care leads the pack, and Financials are near the bottom. Materials are down sharply today on decreasing prices of oil and other commodities. This is based partially on a surprising strengthening of the dollar, which flies directly in the face of a huge trade deficit, which we discussed last week, as well as various leaked agenda items from this week’s G20 Conference in Pittsburgh, which in the aggregate appears negative for the dollar.

Dealing with a Schizo Market. So what’s an investor do in such a schizophrenic market?

The answer is to play it safe by taking profits on anything that even hints of overvaluation and perhaps purchasing some protective puts in some of the overvalued areas. According to our forward-looking sector rankings, this includes Financials, Energy and Materials.

Of course, the prudent purchase of attractively priced stocks in favored sectors is a positive.

Stocks to Consider

One of last week’s picks, Corinthian Colleges (COCO) got a big pop Monday, along with the other education stocks like APOL, DV, ESI, STRA, and CECO. Of this group, all except CECO are rated Buy by the Sabrient Ratings Algorithm.

This week, I ran a MyStockFinder search using the Undervalued Large-Cap Growth preset search, but also included mid-caps and up-weighted Long-Term Technicals and Insider Buying a bit. Here are some stock ideas that look intriguing:

• Gilead Sciences (GILD) – Healthcare
• Raytheon (RTN) – Industrials
• Best Buy (BBY) – Consumer Discretionary
• NRG Energy (NRG) – Utilities

Comments

[lucky lenny:]

Obama’s deficit spending is great for companies such as BestBuy which is consistently making profits. Although $2 trillion of debt in one year is insane. As I don’t want the US$ going the way of the Argentine Peso and Turkish Lira. Having said that, I think companies such as BestBuy, which is profitable and receives spending by consumers, w/ benefit tremendously. All that money flooding into the stock & bond markets; combined with all of BestBuy’s selling advantages, i don’t think BestBuy could ask for a better scenario.

Sep 23 05:25 AM

[Michael Clark:]

"While I am not a psychiatrist, I am tempted to diagnose our current market as borderline schizophrenic because it has shown a tendency to go up on bad news but also often go down on good news."

Really? I'm not a psychiatrist either, but I've observed this market's tendency (or law?) of going up on both good news (there hasn't really been a lot of good news) and bad news (and the amazing ability to transform bad news into good news). This is a form of denial of reality -- In classical (psycho-dynamic) psychology, denial is an unconscious ego defense mechanism, through which a person unconsciously puts up a barrier to experiencing what is too painful to consciously bear.

Denial is the first stage of a death process, followed by anger, bargaining, acceptance and then depression. Economic depression if a form of cultural death. In fact, I think the cultural death process begins to happen, and economic depression is a symptom of the spiritual death process -- so trying to 'fix' the economy won't really work because it is the 'death process' that has to but cannot be fixed by simply manipulating the money supply.

'Doom is in the bud' Dylan Thomas wrote. Every atom has a built-in self-destruct mode, a time for manifestation, after which the death process strikes. Every form is living with an alarm clock. When the alarm clock goes off, the spiritual death process begins.

By the same token, the death-process leads to rebirth. At rebirth, a nation re-creates an updated form of itself, having learned something (we hope) from the mistakes made during the last life or period of expansion.

Sep 23 06:41 AM

[Michael Clark:]

I'm taking it you own BestBuy.


On Sep 23 05:25 AM lucky lenny wrote:

> Obama’s deficit spending is great for companies such as BestBuy which
> is consistently making profits. Although $2 trillion of debt in one
> year is insane. As I don’t want the US$ going the way of the Argentine
> Peso and Turkish Lira. Having said that, I think companies such as
> BestBuy, which is profitable and receives spending by consumers,
> w/ benefit tremendously. All that money flooding into the stock &
> bond markets; combined with all of BestBuy’s selling advantages,
> i don’t think BestBuy could ask for a better scenario.

Sep 23 06:44 AM

[Roger Knights:]

Circuit City's bankruptcy has given BB a boost.

Sep 23 07:01 AM

[lucky lenny:]

Michael,

Of the recommended stocks on this post, BestBuy does look the most attractive. BestBuy has upped earnings guidance to $2.70 to $3.00/share. On a personal level, I think places such as BestBuy & the former Circuit City are excellent; compared to Walmart. At BestBuy, they have tons of turnover, so they can always offer the most current models at the same or lower prices than Walmart. On a mixed note, I can never understand why BestBuy has so many sales reps hanging out on the floor. In summary, with the stock price under $39; and former Circuit City’s customers such as myself taking our business to BestBuy, I do think BestBuy looks very attractive. And your take on BestBuy is what?


On Sep 23 06:44 AM Michael Clark wrote:

> I'm taking it you own BestBuy.

Sep 23 07:12 AM

[Michael Clark:]

I didn't really attempt to answer the author's question: 'What Do Schizophrenic Markets Want?" (What do markets (and investors and market participants practicing denial) really want?)

They want free money from Ben Bernanke to keep flowing in their direction. That's simple. Once the Fed backs off of its sponsorship of new bubbles in stocks and (attempts to re-bubble real estate) then bonds fall, interest rates rise, stocks fall, the market in denial becomes the market of angry investors and market participants, gold rises, the dollar attempts to rise but has trouble rising because it is no longer really as 'safe haven' as it once seemed, and deflation really sets in as the 'V' turns into a 'W', I guess paying homage to George W. Bush one last time. Anger in the country -- at having to die -- is unleashed and many ugly things begin to happen -- scapegoats get blamed, America becomes more polarized, bankers get attacked, some may get lynched on the streets, stocks collapse, demonstrations of unemployed become riots when police seek to restore order (destroy ardor for 'real change')....then, eventually, we are lucky to enter the bargaining stage. At this stage we try to bargain with God (who no longer looks anything like Ben Bernanke, who has meanwhile been arrested and is standing trial for corruption and being held in protective custody for his own safety), promising God we will never again cheat or steal or blow financial bubbles for the sake of debt accumulation and massive profits for banks if God will only relent and not make us go into the dark wood by ourselves without parental guidance. But it is when passing through doubt, fear and depression that we get a glimpse of who and what we really are as a nation, so that, when the alarm clock (the reverse alarm clock, changing contraction into expansion) goes off, we will have a more pure picture of who we should be as a nation, in contrast to the dark picture of corruption and selifishness we now have.

This vision comes to us only as we enter the stage of acceptance of our own death; and then sink into depression. When the depressive state is at its deepest and darkest, a tiny light is born, a light illuminating the new life we will become. But that is not the end of anything. We will need to pass out of the darkness. And standing at the edge of darkness will be a Dark Giant wanting to destroy us. The hero, to achieve rebirth, must confront and defeat the force of the Storm-God, Darkness, which wants to kill the new life before it is born. (Remember Herod seeking to kill Christ? That was a Christian emblem of the same reality.)

This is the pattern of understanding that mythology offers us at least. I know this won't appeal to everyone. But knowledge is embedded in mythology -- modern man has just forgotten how to find this knowledge, since it is not a rational, causal, one-foot before the next-foot kind of understanding.

Sep 23 07:21 AM

[lucky lenny:]

Roger,

I don’t think the pro’s on Wall Stret have fully factored in the impact of Circuit City’s bankruptcy on BestBuy. Per Circ City’s 10-k for fiscal yr ended 2/29/08, Circ City did $11.7 bill in sales for the year; had 693 stores in the U.S; 779 non-american stores, mostly in Canada, and the stock, CC - traded in the low 30’s in 2007; & paid a $.16/sh dividend in ’08. Given that BestBuy does about $45.0 bill in sales in yr ended 2/28/09; and competed on most products & delivery channels, I have to believe BestBuy will be able to ease up a bit on advertisng, expansion, remodeling, etc... And at the same time not have to be as aggressive on pricing. Granted, once PC Richard & others take over Circ City’s old stores, the environment will change. That won’t be for a few years. In the meantime, I think BestBuy has some breating room to really increase profits and profit margins. Stock currently under $39/share & projecting earnings of $2.70 to $3.00 in the year ending 2/28/10.


On Sep 23 07:01 AM Roger Knights wrote:

> Circuit City's bankruptcy has given BB a boost.

Sep 23 07:41 AM

[Michael Clark:]

Lenny:
I wanted to reply with pictures -- so I did an instablog with my response on BestBuy. I consider BBY a HOLD at the moment. I discuss it more in detail at:

seekingalpha.com/insta...


On Sep 23 07:12 AM lucky lenny wrote:

> Michael,
>
> Of the recommended stocks on this post, BestBuy does look the most
> attractive. BestBuy has upped earnings guidance to $2.70 to $3.00/share.
> On a personal level, I think places such as BestBuy & the former
> Circuit City are excellent; compared to Walmart. At BestBuy, they
> have tons of turnover, so they can always offer the most current
> models at the same or lower prices than Walmart. On a mixed note,
> I can never understand why BestBuy has so many sales reps hanging
> out on the floor. In summary, with the stock price under $39; and
> former Circuit City’s customers such as myself taking our business
> to BestBuy, I do think BestBuy looks very attractive. And your take
> on BestBuy is what?

Sep 23 08:02 AM

[enigmaman:]

Wall Street magicians bag of tricks is empty, is the market recovery for real or just a result of slight of hand, misdirection and gimmickry, only the economy knows for sure

Sep 23 08:22 AM

[Mad Hedge F...:]

dsa The one absolute, take it to the bank, bet the ranch fact you can count on right now is that there is no value in the stock market. We are at a lofty 20 X earnings, and historically, when the market sported such a valuation, a 7% drop ensued in the following year. But what is history, but the ravings of an angry, frustrated old trader? Maybe having seen the best bargains in a century only six months ago, I’m spoiled. I have always been a tightwad. I must be the only guy around who flies his own private plane to garage sales for the sheer love of the deal. I just reviewed all of the stocks and sectors I liked at the beginning of the year, and a more picked over field you never saw. (Click here for my new year list at www.madhedgefundtrader... ) The list is long: FCX, FXI, BYDFF, BIDU, X, gold, silver, copper, crude, oil services, junk bonds (JNK), (HYG), emerging markets (EEM), BRIC’s, Korea (EWY), with shorts in long dated Treasuries (TBT), volatility (VIX), and the dollar (UDN), (ULE). Even tax exempt munis have been on a tear. Many of my core positions are up over 400%. The problem is that my more loyal, even fanatical followers have taken out paid subscriptions for up to two years, so I must keep dancing. Hence, the recent increase in book reviews, political pieces, or just outright frivolous stories. What you do here is deep research and list building, so when the window opens you can jump through with both feet, and without any reservations. I hate being out of the market. But I hate losing money even more.

Sep 23 09:30 PM

[untrusting ...:]

Lenny,
Don't know why you think BBY is much of a deal at the level it is at. Given that BBY closed at $38.33 with a 52-week range of $16.42-$42.06 or about 8% below the high for the year. Also the stated PE=17.3 and the stated dividend is $0.56 for a 1.46% yield

Personally we would consider it well overvalued at those levels (especially for a recession), low dividend yield, much more downside risk than upside potential, etc.

Surely there are many stocks out there with much better potential than BBY. As an example, compare that to PVX (energy play). PVX closed at $5.83 with a 52-week range of $2.23-$9.84 or about 41% below the high for the year. The PE=8.6 and the stated dividend is $0.6752 for a yield of 11.62%

So in comparison PVX has much better upside potential, oil and gas is probably a much better sector than retail, the PE is much less, and the dividend is much better.

For the same dollars, $38.33/5.83 we could buy 6.5 shares of PVX and make 6.5 x .6752 = $4.3888 dividend for PVX vs. just $0.56 dividends for BBY. Not to mention the better upside potential in PVX and less downside.

Now having said the above, we have investments in neither BBY nor PVX, and have not done any significant further research in either. But on the surface, PVX as an example, would be a much better risk and investment than BBY at this point. We do have PVX on our watch list and probably will buy some if the market corrects downward as we expect it to do in the relatively near future and entry levels become more attractive.

Personally we are just selling well out of the money puts, collecting the premiums, and waiting for lower prices if they happen. With a few core long positions, we just sell the covered calls and collect the premiums. Our view is the market is far to risky to buy long at these levels. In fact the better risk/reward at this point is probably tilted towards short plays for the near future for most stocks, although that is a risk and one has to be very careful with any short plays.

But hey, it's your money so if you think BBY is a deal, go for it. It is not a stock we would consider as an investable play at this point.
But, then that's just our opinion.

On Sep 23 07:41 AM lucky lenny wrote:

> Roger,
>
> I don’t think the pro’s on Wall Stret have fully factored in the
> impact of Circuit City’s bankruptcy on BestBuy. Per Circ City’s 10-k
> for fiscal yr ended 2/29/08, Circ City did $11.7 bill in sales for
> the year; had 693 stores in the U.S; 779 non-american stores, mostly
> in Canada, and the stock, CC - traded in the low 30’s in 2007; &
> paid a $.16/sh dividend in ’08. Given that BestBuy does about $45.0
> bill in sales in yr ended 2/28/09; and competed on most products
> & delivery channels, I have to believe BestBuy will be able to
> ease up a bit on advertisng, expansion, remodeling, etc... And at
> the same time not have to be as aggressive on pricing. Granted, once
> PC Richard & others take over Circ City’s old stores, the environment
> will change. That won’t be for a few years. In the meantime, I think
> BestBuy has some breating room to really increase profits and profit
> margins. Stock currently under $39/share & projecting earnings
> of $2.70 to $3.00 in the year ending 2/28/10.

Sep 23 11:01 PM

[absolute re...:]

I am new to Seeking Alpha and am exploring all that is here. I tend to agree with "untrusting" about the market direction but if I have learned anything in my years of investing it is that I don't have a clue which direction the market will go. I try to use options to buy calls on the stocks I like, puts on the stocks I don't and find flatline stocks to sell calls on so I am market neutral and close to cashless (other than margin). I will look up PVX. I like the things on this Sabrient site too. I welcome any constructive advice.

Sep 24 03:26 PM