Last week’s rally gave us the first positive week in a month, and it continued Monday, with the S&P 500 gaining a robust +3% in one day and barreling through the theoretical ceiling of 1,200 to close at 1,210.
The reasons for the rally? Hard to say.
Based on the deluge of worrisome news of last week, one would think that a rational market would flee to safety. Turbulence continued in Libya; violence worsened in Syria with no end in sight; ditto for Iraq and Afghanistan; and the euro weakened further when it was revealed that Finland had demanded collateral for guaranteeing the bailout loan to Greece.
Closer to home, two chaotic events struck Washington D.C. -- but this time, rather than Congress, it was the startling earthquake and a damaging hurricane. And then there was Fed Chairman Bernanke’s speech at Jackson Hole, Wyoming. His remarks were initially perceived as negative, with the market immediately dropping 200 points, but it quickly recovered and kept on going up.
Worrisome economic reports would also suggest a flight to safety. Jobless claims increased last week; the first revision to the second quarter GDP fell from 1.3% to 1; consumer income rose only +0.3% versus an expected +0.4%.
But the market paid scant attention to all these worries. Small-cap growth, the antithesis of a flight to safety, led the cap/styles, up +6.7% for the week; large-cap value, the epitome of a flight to safety, was the worst-performer at +4.0%. As for sectors, if you’re worried about the state of the economy, you’ll flee to safe sectors like Utilities, Consumer Non-Durables, Energy, and Healthcare — and if you’re optimistic about the future, you’ll head to Capital Goods, Technology, and Basic Industries.
In fact, the flight-to-safety sectors were at the bottom of the heap, while sectors that reflect optimism were at the top, with Capital Goods, Technology and Basic Industries all gaining more than +5.0% last week. Is all this just the market’s lying eyes, or did it glimpse silver linings in the week’s worrisome news?
Consumer spending rose +0.8% despite the modest gain in consumer income, eclipsing last month’s -0.1% and the expected +0.5%. Neither the earthquake nor the hurricane was as bad as originally feared, although they generated an estimated $50-plus billion in damages. Bernanke’s speech was ambiguous enough to hide your choice of stimulus between the lines.
The global storm clouds also held possible silver linings. Libya’s turbulence sent Gaddafi into hiding and will likely result in his ouster. Syria received a slap on the wrist with warnings from Turkey and Iran that at least upped the risk for President Bashar Assad. The ailing Greek banks are considering merging into one bank, which may have cheered investors who believe in “too big to fail.”
The best bet for the rationale behind the rally is Warren Buffett’s decision to invest billions in the ailing Bank of America (BAC). Mr. Buffett has rarely been wrong. To paraphrase one of his many quotes about the market:
“I never know when the market is too high or too low, I only know when it’s time to buy and when it’s time to sell.”
So if he’s betting on Bank of America, perhaps other bargains are out there for the individual investor.
Bargains usually come with low P/E ratios. If you’ve followed this newsletter for the past two weeks, you know that we’ve been reporting on the level of the projected P/E (PPE) for the year ahead for our top-ranked 100 stocks. This week the PPE reached approximately 7.3, which is considerably higher than last week’s 5.6. We can attribute this not only to the 8% rise in the market, but also to analysts’ downward revisions to this year’s earnings estimates.
In the past 30 days, the “net revisors” (net percentage of Wall Street analysts covering a given stock who have raised or lowered earnings estimates) has fallen below +5%, their lowest level in the past year. Net revisors has been in the +20% range for months, but has fallen all way to +4.8%. And if we look at our highest-ranked 500 stocks rather than the top 100, net revisors was only +1% over the last 30 days, which is the worst reading since the 2008 crash.
The point is, projected earnings have fallen while the market has jumped almost 10%. But a 7.3 PPE is not a bad number, and certainly doesn’t indicate overvaluation. A couple of weeks ago we suggested nibbling at the market, but it seems that in the past few days the market has taken a giant bite. Still, it is only halfway back to its previous highs. If the optimism holds, it could yet have a long climb ahead.
For continued nibbling, here are four more stock ideas for this market. This week, I started with the High Growth preset search in MyStockFinder. I also included Buys (in addition to Strong Buys), and slightly up-weighted Technicals. Here are four stock ideas from the higher-ranked sectors in Sabrient’s forward-looking SectorCast model:
- Coeur d’Alene Mines (CDE) – Basic Industries
- CARBO Ceramics (CRR) – Energy
- Luminex Corp (LMNX) – Healthcare
- Keynote Systems (KEYN) – Technology
Disclosure: I personally hold KRO, and the Sabrient Investor’s Hedge and Earnings Busters virtual portfolios hold long positions in KRO, GGAL, and KEM.
Disclaimer: Solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.