It is hard to predict where the stock market would have gone if America's politicians did not procrastinated on the debt ceiling decision. Many can speculate how much smoother the debate could have gone if deliberations began a year ago; or even earlier. I am hoping for a resilient turnaround in the stock markets even though many signs point to a market ready to collapse under the weight of too much debt and steady unemployment figures.
If the imposing spending cuts are derived smoothly and fairly we should see a jump in the stock market, even though the most recent GDP, ISM Manufacturing Index, and employment numbers show a slowdown in the economy. These numbers could have been predicted by reading my article that discusses a Wells Capital research note. For the most part investors had been ignoring these numbers prior to the debt limit deadline. This appears to have been due to high hopes and optimism the Senate will pass an intelligent debt limit bill and President Obama will sign off with no questions asked.
In order to properly decide where stocks would be without this hiccup, it will be imperative to assume the debt ceiling was raised several months ago in a timely and orderly fashion. As mentioned above, since the stock market has been ignoring economic data the first half of 2011, I will ignore the fact that the stock market should fundamentally be slowing down. In this assumption I will detail several stocks and discuss where the share prices would be if everything was growing at a healthy pace. Therefore once politics no longer effect the markets, stocks will rise to these levels and the markets will stabilize.
To begin it is important to note the Dow Jones, Nasdaq, and S&P 500 began to feel the pressure of the debt ceiling around July 21st. The Nasdaq and S&P were able to hold on one extra day as both indexes closed on July 22nd at 2858.83 and 1345.02 respectively. It has been all downhill since then as the Dow Jones has slid about 10.5% over 10 trading sessions while the Nasdaq and S&P have slid 10.6% and 10.7% respectively over nine sessions. July 20th will be the starting point for analyzing the stocks below because it appears investors began to worry about the pending debt limit and economic data at this time.
The Silver Trust ETF (SLV) has seen slow momentum over the past several months after the spike earlier this year. Silver began to see more action as the debt limit deadline approached and a slowing economy began to show its teeth. It must be noted silver is still inflated as investors can't seem to get away from the metal as the U.S. economy continues to sputter. The ETF eclipsed the 40 resistance level and stayed above 40 all of August 3rd. Even before Wednesday I warned the silver ETF does not have much room to run. And if the ETF is above 40, this applies exponentially.
If it weren't for political issues we would be seeing the ETF around 33-35 range where it belongs. This range may be inflated as well, but silver is very comfortable at that level. If the best case scenario happens with the debt limit, silver would take a dive because this would be a sign the economy is strong. However with the GDP and ISM Index showing weakness I don't see this happening. I also don't see the silver ETF staying above 40 for any sustained period; unless Gold reaches 1750-1800 or the markets begin a slow downward trend.
One of the most unlucky companies throughout this saga is Riverbed (RVBD). Riverbed announced earnings two days before the markets began to react to the debt deadline. This would normally not be a problem, however since Riverbed gave a poor outlook the stock was punished. The share price has slid about 34.8% over the last 13 trading sessions. While many feel networking stocks are in for a rough patch over the next few months and years; the truth is Riverbed's stock was a bit overpriced prior to earnings. Therefore the share price was due for a selloff. Even though the stock currently rests under 30, Riverbed is still not a good buy. In fact if it weren't for the political and economic problems, Riverbed's share price would be the same as it is right now. It may seem like Riverbed's fall has been compounded by overall market pessimism, but the dip has been compounded by an overall negative sector outlook.
One technology stock with bullish sentiment is Apple (AAPL). After another amazing quarter Apple has not been stopped by the overall market. In fact, if a mini market crash does occur Apple might be a company to fill your portfolio with since the iPhone revolution is continuing strong as more phone providers are offering better deals. It must be noted Apple's stock did slow down when the indexes began to halt over the July 21st to July 22nd period. The stock's peak at 404.50 attributed to a standard pullback that is needed before the share price can reach new highs.
The stock might have tested the 385 floor August 3rd as it dove under 383. However as the crash on Thursday shows, the stock does have the potential to free fall as the share price fell to 377. We saw this same pattern when Apple's stock fell to 315 before rocketing to 404. When the market stabilizes it would not be surprising to see Apple run to the 415-420 range.
One company that many feel was negatively effected by the debt limit deadline is ExxonMobil (XOM). While the company did report a negative outlook on July 28th, the share price had already began falling in line with the two smaller indexes. However the indexes may have had little to no effect on the share price. As the demand for oil has been shrinking in America, investors may not see Exxon as a viable long term choice since the company is already dealing with margin issues. Also, if the price of oil continues to fall under the 92 level, we should be seeing a continued selloff in Exxon's stock.
A major selloff is not appropriate because the company is very well run, however the expansion into new oil regions will continue to take a bite out of the companies margins for the next couple years. Therefore Exxon's stock would have seen this same slide if the economic and political issues were not present. A better choice for the short term (i.e. 6-10 months) is Chevron (CVX). Chevron has been doing very well lately and may begin to close the gap on Exxon.
On the other hand, Domino's Pizza (DPZ) has been hurt by the recent debt ceiling issues. With that said the stock has been one of the few gainers over the past ten trading sessions. To recap, the share price rocketed above 28.50 after a blowout quarter was announced. After this peak the stock dropped as low as 25.07 on the morning selloff on August 3rd. A healthy pullback would have been around the 26.50-26.80 range. However with the political events scaring investors the stock barely moved into that range Wednesday.
This shows many stocks will rocket up once traders and investors are calm and the market stabilizes. Long term investors may want to note Domino's stock has risen over 100% in the past year. However the company has more room to run as the company will be implying cost cutting measures and expansion. Domino's share price will move to the 28-29 range the economic and political issues are resolved and forgotten by traders.
Two technology companies that have seen a strong downward move since the debt ceiling deadline became imminent are EMC (EMC) and JDS Uniphase (JDSU). EMC reported another average quarter last month and the stock had a healthy run. EMC's results are historically average because the company is facing snail like growth. For ultra long term investors this is good, but for traders and shorter term long term investors this is not something to get excited about.
JDSU's stock has completely crumbled the past few sessions. The share price has dipped well below 12 and the stock currently rests under the 12 level. Much of this has been due to negative outlooks by competitors. However the slowing economic data and debt limit deadline can be attributed to the slide as well. Both companies would be higher if these issues were not been present. EMC would be around the 27 level while JDSU would still have taken a hit and been at the 14-14.50 level. However with JDSU's earnings coming in about two weeks, expect to see a slight run up as the few bulls still grazing are hoping for strong numbers.
Polypore International (PPO) released earnings on Monday, August 1st and the stock fell the following day. While the company blew past expectations, the same common theme as many companies followed; a negative outlook. With many of the major companies reporting negative outlooks, it should be a warning to investors the economy is slowing down and it may be a good time to take profits while you still can. Nevetheless Polypore has rocketed down then back up the past two days. Regardless of the current share price Polypore should find stability around the 65-66 level.
Cummins (CMI) stock has done very well of staying ahead of the market. The company has been hit hard by slowing growth throughout the world; yet the share price has yet to crumble. Despite the slowdown, Cummins most recent earnings showed signs of continued growth. In fact I would recommend Cummins as a better long term buy than Caterpillar (CAT) at this moment. Also, the stock is not far from where it would be if the debt limit deadline did not shake the market by the ankles. While the stock price did drop under 93 during Thursday's mini flash crash, the stock should rebound very well. I expect the stock to continue to push the 52 week high if the market can return to normal levels of stability.
Bank of America's (BAC) stock has seen negative momentum since April 2010. This is in line with many financial stocks because this sector has been very weak recently. Also, many investors do not trust the financial sector after the housing bubble collapsed that arguably led to the current economic situation. The banks should not be blamed for everything, but the truth is banks made receiving mortgages and loans too easy for people that may not be able to pay the money back. While Bank of America has undergone quite the share price loss, the stock did jump 7% the two days prior to the market slide. Since that time the stock has lost the same as the indexes. Therefore, assuming the market dip is due to the debt limit issue, Bank of America's share price will be at least 12% higher when the market stabilizes.
Pfizer (PFE) has gone into an unnecessary tailspin since July 21st. The stock has fallen about 13.6% during this period. Pfizer is historically a sturdy company and this drop has been more than what the stock deserves. The company more or less dips after big events; which is typical of healthcare companies. Nevertheless as Pfizer gears up for the hopeful approval of Eliquis and an over the counter Lipitor, the stock might be reaching a level where buying would limit the risk. However with the current market situation any buy could turn into a huge loss overnight. Pfizer has strong consumer momentum and if the company can get Lipitor sold over the counter, margins will increase. With that said investors must keep in mind if the market continues to tumble Pfizer will lose double the% the indexes lose.
The information above is intended to show investors where these stocks might end up when the debt limit bill and economic data stabilizes. Since this bill is currently weighing down the market it will be difficult for many stocks to break to the upside on a sustained level. Also, many stocks will present opportunities to buy and sell intraday as the volatile nature of the market bounces prices to unbelievable lows followed by sharp runs. With this said if the economy is approaching another recession it will be difficult for the market to pull out of this rut.