Editor's note: This article was submitted by the author with the title, "The Cause Of Monday's Sell-Off." We changed the title to "Monday's Fall Probably Represents No Serious Threat To The Recovery," which doesn't accurately represent the author's view below, in which he qualifies his optimism with two important "IFs." We have reverted the title to the original, and apologize for the misunderstanding.
So why did the Dow drop 275+ points, the S&P 500 32 points and the NASDAQ nearly 53 points? The S&P closed at 1253, still above the range-bound area of 1220 to 1120 that had held it captive from August 2 until October 21. Of course I don’t actually know, but I can give you a few clues.
First, October had delivered an incredible +13% gain to the S&P 500. One of the best months in history! Last week produced mediocre economic data and an EU plan, while spectacular in goals, had few details or actual deals. And while Q3 continued to deliver solid earnings gains, there were plenty of disappointments. Another clue should have been that the week with all the EU hoopla ended with a paltry 0.5% gain for the S&P on Friday. With no clear progress from EU or the gridlock in our congress over the weekend, a stout round of profit-taking on Monday makes sense. Oil was down and the dollar was up sharply. Neither helps the market generate positive movement.
It would seem that we need specificity from the EU on its resolution of the current Euro crisis. We need our dysfunctional congress to end its gridlock and move our economy forward. Finally, we need the banks to resume lending and the cash-rich corporations to begin spending. Let’s face it: the alternatives to equities right now are the moribund opportunities in the fixed income market or the continually crashing real estate universe.
Here are the market stats.
Not all is lost. October ended with Net Revisions at 10.8 for the last 30 days for our 100 highest rated stocks (its highest reading since early August). Even better, the forward quarters' estimated valuation score for the same stocks is 6.43 compared to 4.84 back at the market high on May 2, 2011 (nearly a 50% increase). Finally, the secular 5-year forecast for earnings growth of these stocks reached 12.95%/year, the highest since early 2007. Results for the top 300 and 1000 stocks had similar highs.
Last week our own economic releases were barely decent with the 2.5% gain in Q3 GDP leading them. Keep in mind that the first estimate is frequently revised downward. Personal income was up a bit less than forecasted while spending was better than expected. The gain wasn’t due to fresh employment as initial jobless claims remained around 400K.
As for sectors, we have finally completed our conversion to the Thomson Reuter Business Classification. Our Top 5 projected sector performers occupied 4 of the Top 5 spots last week, led by Basic Materials, up 11% for the week. Healthcare was the only miss, and that is understandable due to the uncertainties surrounding how the Republicans will reshape Obama Care. The market absolutely hates uncertainties. Small cap growth led last week’s style caps, gaining over 7.6%. Large cap growth was last with a very respectable gain of 3.8%. Growth leads Value for some months back, whether it is small or large, due to the steady earnings gains in the growth stock area.
Healthcare, Financials, Energy and Basic Materials are rated high. Cyclical and Non Cyclical Consumers are low along with Utilities. Technology, Industrials, and Telecommunications are OK.
To conclude, Monday’s fall following Friday’s meek showing probably represents no serious threat to the market recovery IF the EU acts upon its plan and IF our congress does something constructive. The market wants less uncertainty and more jobs and those two IFS are very big IFS. Stay cautious, buy bargains, and consider hedges.
3 Stock Ideas for this Market
This week, I built a search in MyStockFinder that focused on Small and Mid-Cap Growth at a reasonable price. I included Buys and Strong Buys. Analyst Revisions were given maximum importance as were Earnings, Balance Sheet, and Fundamentals. Here are three stock ideas that look intriguing:
AGCO Corporation (AGCO) – Industrials
Analogic Corporation (ALOG) – Healthcare
Pan American Silver Corp (PAAS) – Basic Materials
Disclosure: The author does not hold any of the stocks mentioned in this week’s “Stock Ideas.”