After spending most of the day in the red, the markets closed up Monday in a last minute rally. The reason? Rumors that Italy is having talks with China about helping with its debt. Mind you, Greece has been the looming concern for investors as it edges closer and closer to default, but the markets’ turnaround shows its hair-trigger concern about the European situation. Veering from pessimism about a Greek default to optimism that such an event might not create a domino effect—because Italy might be huddling with China—just shows the extreme nervousness of investors or their appetite for good news.
Further evidence of investors’ concern is the 10-year Treasury note, whose yield dropped to a new low of 1.9% last week, after being 2.3% just a couple weeks ago. Imagine tying your money up for 10 years at 1.9% a year!
Nor does the domestic economy offer much in the way of comfort. Last week the ISM non-manufacturing report showed a glimmer of improvement, coming in slightly above the prior month and consensus; and our trade gap narrowed by about $8 billion. But these were offset by increased jobless claims (414K) and rising wholesale inventories (from 0.6% to 0.8%).
The President’s jobs proposal last week seemed like a positive step, but as usual, the devil is in the details. An even bigger devil is whether Congress can get anything passed. We’ll give it an unenthusiastic “maybe.”
This week we get a deluge of economic reports that might or might not relieve investor concerns. All the inflation-related reports are up this week, including, PPI, CPI, and export/import prices. And retail sales, industrial production, the Philly Fed report, and the Michigan Sentiment Index will give us a lot more to chew on. Hopefully, they will taste good. The Treasury budget, which comes out Tuesday, will likely make our taste buds shrivel.
Market Stats. The market was down again last week, with the S&P 500 Index falling 1.7%. This makes six down weeks out of the past seven. Since late July, the S&P 500 has been “chattering” between a low of 1120 and a high of 1220, hitting the upper and lower ends of the range about six times each. Even with the end-of-day rally Monday, we’re now closer to the bottom of that range.
Style-cap really didn’t matter last week, with the best performer Mid-cap Growth (down -1.23%) barely better than the worst performer, Large-cap Value (down -1.69%).
Surprisingly, the sectors were led by Technology, down less than -1%, probably due to acquisition activity and the fact that there are some very attractive valuations in that sector. As you might expect, the absolute worst sectors were Finance, Capital Goods, and Consumer Durables, each down well over 3%.
We had warned about Finance last week, due to a plethora of litigation and potential litigation among the large banks, as well as uncertainties regarding European banks. None of that has changed. Further evidence of the lack of change is our forward-looking SectorCast, which is virtually the same as previous week.
Looking Ahead. One positive note in all this is the rolling weekly P/Es and projected P/Es that we’ve been talking about each week, both of which continue to improve. Our top 100 stocks have a P/E of 9.2 and a PPE of 7.0, and our net revisor figure last week rose from 5 to 6.6%. So there are still opportunities for investments, and we offer our weekly stock ideas below.
However, if you want to hedge your bets, here are a couple of suggestions. If you’re thinking the euro will go lower, you might short FXE, and ETF called the Euro Trust. FXE has fallen from a recent high of 150 to 135 and has been as low as 125 over the past few years. If Greece were to default, it is likely the euro would fall further, so shorting FXE might offer some downside protection without a whole lot of upside risk.
An additional possible hedge is VXX, the iPath S&P 500 Short-Term Futures ETN, commonly called the “fear index,” which rises as investors’ fears increase. The VXX has risen from 20 to 50 since July, but it has a long way to go to reach the fear level of March 2009 when it was 450. You would hedge by going long the VXX.
4 Stock Ideas for this Market
This week, I started with the GARP (Growth At a Reasonable Price) preset search in MyStockFinder. I also included Buys (in addition to Strong Buys) and slightly upweighted Technicals. Here are four stock ideas that look intriguing:
Valero Energy (VLO) – Energy
BioMarin Pharmaceutical (BMRN) – Healthcare
Research in Motion (RIMM) – Technology
Dollar General (DG) – Consumer Services