Stocks Continue to Struggle Since the Election Peak

 |  Includes: EA, GM, HAS, KO, MAT, MUB, PEP, SPY, TTWO
by: Finance Banter

The much-maligned Government Motors is slowly, once again, becoming General Motors (NYSE:GM). In one of the largest initial public offerings (IPO) in history, the government sold off roughly $16 billion of the company. While not all the holdings, the amount held by the collective taxpayer has been whittled down a bit, while the investor coming in after the IPO is already showing a loss, as the first public trade was at $36 and closed the first trading week just above $34. While this large transfer of ownership is seen as an overall good for the taxpayer, investors may not fare as well, as a study of the largest 16 IPOs showed the market essentially flat after a month and down just over 4% after six months ( In addition to GM, the markets took note of things overseas, as China continued to tighten monetary policy in the face of higher inflation, while far off the East Coast, Ireland was still struggling with handling their debt. In a reprise of concerns over Greece earlier this year, the Ireland news led to the largest market decline in 3 months (followed quickly by a big rally). Investors will be thankful for a short week and lots of turkey – here’s to a Thanksgiving nap.

While the major market averages were essentially unchanged for the week, the “averages” masked serious erosion below the surface, as more than twice the number of stocks declined last week than advanced on the NYSE and volume jumped on the big Tuesday drop before receding as the markets regained their losses. Very bullish investor sentiment was noted last week and on top of the euphoria surrounding the GM IPO, the markets may go into a winter slumber as investors begin looking for signs of economic life from the Fed’s “goodwill” plan of injecting money into the financial system. For the first time in three months, the net number of declining stocks is now above those rising (looking at the past five weeks). The very low number of declining stocks as of early October matched the lows in mid-March, about a month before the markets peaked. Whether a 10% correction is in our future, as it was in April is still in doubt given the large footprint of the Fed, but feeling that nothing bad can happen (judging from the bullish sentiment) gives me a queasy stomach.

The bond model has had two negative weeks in a row, signaling that bond rates, at least over the short-term, are likely to rise from here. Rates have already pushed higher, as investors undo what the Fed is trying to do by buying up treasuries. The municipal market has been rocked as worries over defaults around the country roil municipal bonds, with one of the larger ETF muni bond funds (NYSEARCA:MUB) falling nearly 2% in two days on 6-7 times normal volume. Rumors of the next financial crisis hitting states/municipalities on top of large bond issuances is making investors rethink their commitment to these tax-exempt bonds. Given the quickly higher yields over the past few weeks, rates may not keep up the breakneck pace, but a trend toward higher rates may be in place.

The top of the heap and the dregs at the bottom of the cup changed very little over the past few weeks, but the middle saw all kinds of shifts. However it is hard to make any sweeping generalities about the implications of those changes. For example, the soft drink group (ok – KO) has been doing very well since the bottom in July, however PEP has struggled, and a big under performer since July. With the holiday season upon us, investors may be looking at the toy companies. The “old line” companies are doing well: Hasbro (NASDAQ:HAS) and Mattel (NASDAQ:MAT), while some of the new tech companies Take Two (NASDAQ:TTWO) and Electronic Arts (ERTS) are not faring as well. In a market that has been split much of the year between the haves and have-nots, we are seeing much of the same type of performance within various groups, an indication that it truly is a more of a stock-pickers market when you get below the general asset class rank. We’ll have to see, whenever the correction comes, whether the split within the various industry groups holds through the market decline.

Stocks continue to struggle since the election peak. Some higher global rates and sovereign concerns are once again gracing the headlines, forcing investors to rethink their ebullient feelings toward stocks. Monday may be the heaviest trading day of the week, as investors focus on the Thanksgiving holiday. Bond investors may need to focus more on lower yielding short-term rates than the juicy yields on long dated bonds. If yields continue to rise, long-term bonds will suffer greater principal loss vs. their short-term brethren.

Disclosure: None