Stocks tested support in the 1,350 - 1,370 area on the S&P 500 (SPY) Index every day this past week, but did not break down. The resolve of the bulls will be tested yet again as JPMorgan Chase (JPM) has reported a $2 billion loss in its "risk management" trading operation.
This unexpected loss from the largest U.S. bank, which has been leading the charge for fewer government constraints on bank trading activities, has triggered selling in all the major bank stocks. We view this as a buying opportunity for the three banks featured in last week's group report: PNC Financial, BB&T Corp., and U.S. Bancorp. These three banks engage in little of the activities that resulted in JPMorgan's losses and they have not been buffeted with selling over concerns about sovereign debt losses stemming from Europe.
What Will the Stock Market Do From Here?
Markets worldwide have been focused on the election results from Greece and France which, though expected, were disquieting nonetheless. Concerns about Greece rejecting the agreed upon austerity measures and Germany's intransigence regarding austerity as the path to prosperity have once again pushed Spanish and other eurozone interest rates above the warning levels, which have been watched by market participants.
What you should be most keenly aware of is that in uncertain times when markets are falling, the media likes to trot out the doomsayers like Marc Faber, Nouriel Roubini and other less grounded naysayers, as if a declining stock market is an event which needs a cheerleader. While all of these doom and gloomers have been right at some point in their careers, will their pessimism help you in achieving your investment goals?
So far with all this "bad news" the U.S. stock market has held up remarkably well. The whiff of positive good news from Europe causes the stock market here to rally, precisely because the U.S. economy has maintained its slow and steady growth these past three years. It is truly the only game in town for equity orientated investors.
What Are the Risks and Rewards for Stock Investors?
The likelihood is that Europe will continue to dominate the mood of both international and U.S. investors. This preoccupation with Europe has resulted in overnight and early selling in the U.S. stock market. The markets have changed character in the past five weeks in that the persistent late afternoon strength, which has characterized the 27% rally from the October 2011 lows, has not been in evidence.
The risk for investors at this juncture is that the 1,350 level on the S&P 500 Index does not hold and the market falls to 1,280 to 1,300. Investors must weigh that additional 4- 5% risk against the strong possibility that any positive steps toward stabilizing the European economies will result in a rise in U.S. stock prices as underinvested funds come flooding into the U.S. stock markets and the market breaks above the previous high of 1,420 as it usually does in a presidential election year.
Stay the Course
Investors should continue to focus on buying stocks with our strong rating (see my rating methodology) in strong industry groups. These groups currently run the gamut from Large Media and Chemicals to Insurance and Major Banks without trading or sovereign debt exposure. No need to chase stocks as the headlines will continue to provide ample opportunities to buy on weakness.
It remains important in the current market climate to be vigilant and cut stocks out of your portfolio which have bearish ratings. Playing defense is particularly critical when there are no tailwinds from an up trending stock market. Add Wynn Resorts (WYNN) and Juniper Networks (JNPR) to the list of stocks where our rating has steered users away from overnight losses.