On Thursday, the S&P 500 closed below its 50-day moving average for the first time since Labor Day. The index snapped its amazing streak of 130-straight days closing above its 50-DMA. That’s the seventh-longest streak in the last 75 years.
The damage was pretty bad on Thursday. The S&P 500 lost 1.89%, which was its worst break since the post-President’s Day sell-off of February 22. The index closed at 1,295.11 on Thursday and the Dow dropped 229.48 points to close at 11,984.61. For the first time since January, the S&P 500 is below 1,300 and the Dow is below 12,000. In the last five weeks, the S&P 500 has had daily drops of 1.5% or more four times. In the five months prior to that, it happened just twice.
The stocks that were particularly hard hit on Thursday were the cyclicals (stop me if you’ve heard this one before). The Morgan Stanley Cyclical Index ((^CYC)) was off by 2.14%, which is 0.25% worse than the S&P 500. Oil was down sharply due to the unrest in Saudi Arabia and that’s why many energy stocks got dinged by 3% or more. ExxonMobil (XOM), for example, lost $15 billion in market value today which is roughly equal to watching the entire market value of Xerox (XRX) vanish before our eyes.
On days like Thursday, I’m happy we don’t have any energy stocks on our Buy List. It’s not a macro-economic decision on my part. It’s simply that I haven’t spotted any energy stocks that I thought were "must buys."
Whenever stocks go down, it seems like bonds are required to rally, and that’s exactly what we saw on Thursday. There was particular strength in shorter-term maturities. Even the microscopic yield on the three-month Treasury bill got … well, even more microscopic. The three-month T-bill dropped down to 0.065%, which is its lowest yield in nearly nine months.
To add some context for you, that 0.065% yield means that if you were to buy a $1 million T-bill, you’d make $1.78 per day for the next three months. That’s probably the sum total of what’s kept in your average convenience store’s "take-a-penny tray." This is also why, despite my near-term concerns, I’m still a market bull. Any way you look at it, the investing math favors stocks.
At the longer end of the yield curve, the yield on the five-year Treasury fell below 2.1% and the 10-year is now below 3.4%. Both are at the lowest yields in five weeks. This signifies that investors became more risk averse which is the opposite of the larger market trend since last summer.
I’ve written before that the most important outcome of the Fed’s QE2 policy is that it pushes investors out of ultra-conservative assets and forces them to take on riskier assets. This is very good for our Buy List. It also tells us that there’s no use wasting your time in T-bills that will yield next to nothing while there are fundamentally sound stocks, like Reynolds American (RAI), that pay generous dividends.
As I said last week, I think the most likely scenario for the next few weeks will be a range-bound market. Historically, breaking below the 50-DMA signals a flattish market. I’m also concerned that the stream of positive earnings guidance has begun to dry up. Perhaps this will change when Q1 earnings season begins next month. The key fact is that markets generally don’t double in two years, so everyone needs some rest right about now.
The good news is that our Buy List is doing exactly what it’s designed to do-hold up well when everyone else gets nervous. We’ve outperformed the S&P 500 for the last three days and, since February 23, the S&P 500 is down 0.94% while the Buy List is up 0.22%. That’s pretty good for a well-diversified portfolio. For the year, we’re beating the S&P 500 by 1.5%. I think that lead will grow wider once earnings season starts in another month.
In last week’s e-letter, I said that Jos. A Bank Clothiers (JOSB) looks like it might be the next one of our stocks to break out, and that’s pretty much what happened. While everyone else was in a sour mood on Thursday, shares of JOSB jumped 3.33% and nearly hit a new 52-week high.
I like JOSB a lot but I need to explain an unusual tick in JOSB’s business cycle. Actually, this is common for many retailers. JOSB ends its fiscal year on January 31, so it can include the entire holiday shopping season in Q4. Historically, the company makes close to half their annual profit during the fourth quarter.
Since its Q4 results take a bit longer to compile than the other quarters’ results, we probably won’t get its Q4 earnings report until late March or probably early April. Bear in mind what this means: In early April, we’ll be learning what happened in November, December and January. That’s a long time-lag. After the Q4 report, it’s usually about two months until the Q1 report comes out in early June.
Wall Street currently expects JOSB to report earnings of $1.44 per share for Q4 which is likely too low. I expect EPS of $1.50 or more. The details tell us that JOSB is a very solid stock. The company has posted higher year-over-year earnings for 36 of the last 37 quarters including the last 18 in a row. If you’re looking to add JOSB, I’d wait for a pull back below $45 which we may get in the next few weeks. JOSB isn’t worth chasing in a flat market. Let the bargains come to you.
Let me name a couple of stocks that look good right now. First is AFLAC (AFL). The shares just fell under $56. I’ve been saying for a while that AFLAC should make a run at $60.
Ford (F) has pulled back much more than I thought it would. I had thought the stock was about to break $20 but that seems very doubtful. This is a good stock, but the company didn’t communicate well with Wall Street, and therefore it’s being punished. The selling is getting a bit overdone. Ford’s recovery is going so well that it’s considering ditching its valuation allowance held against deferred tax assets. This could add $10 billion to $13 billion in profits this year. Ford is a good buy at $14.
Finally, Johnson & Johnson (JNJ) closed at its lowest price in six months. As blue chips go, you really can’t get much bluer than JNJ. The current quarterly dividend of 54 cents per share works out to an annual yield of 3.62%. That’s more than a 10-year Treasury, and at this point, JNJ is probably a better risk than the U.S. government.
On top of that, JNJ will probably announce another dividend increase next month. It’s increased its payout every year for the last 48 years, so another one shouldn’t be a surprise. If it raises its dividend by another five cents per share, that would bring the yield to 4%. JNJ is a very good buy.