What happened to the bull market? While analysts at firms such as Goldman Sachs were talking about targets on the S&P 500 of 1550 or higher just a couple months ago, the recent negative economic data has led many of these same firms to suggest stocks may no longer currently be a good investment.
Today, with the S&P 500 and its tracking exchange traded fund, SPY, having sold-off hard over the last month, many firms are now suggesting the market may have already seen its high for the year in April.
The Nasdaq and one of its tracking exchange traded funds, QQQ, has sold-off hard this past month as well.
Still, while the spike in Spanish bonds and recent negative economic data are concerning, no new negative news of significance has come out of Europe in the past couple weeks; companies such as Intel (INTC) continue to make bullish statements about the business environment in the Eurozone; the U.S. economy continues to expand at 2-2.5%; and even the recent poor April jobs report was largely in-line with the lower economic forecasts after the ADP and Challenger jobs reports had previously disappointed.
The first reason the market will likely bottom this week is that the recent comments from Intel and companies such as Mastercard (MA) and Visa (V) suggest consumer spending levels in Europe remain healthy. Technology and financial stocks have been the most important sectors that have led the nearly six month rally, and Intel's recent comments were particularly important since John Chambers had recently discussed new weakness that Cisco (CSCO) is seeing in the Euro-Zone.
Obviously Intel is more tied to consumer spending trends, and Cisco has had a lot of company-specific problems as well. Market leaders such as Apple (AAPL) also derive significant revenues from the Eurozone too, so this commentary suggests that renewed concerns over the European economic environment are likely overblown.
The price action of some of the stronger companies in leadership sectors such as technology were impressive after these comments were made as well. While the Nasdaq and most of the broader indexes sold-off, stocks such as Intel and Microsoft (MSFT) rallied on both Thursday and Friday, with each stock rallying nearly 2% at the end of the week to out perform the Nasdaq by more than 2% for the week.
The second reason the market looks to be bottoming is a likely peak in negative news. While the recent ADP and Challenger jobs reports were disappointing, the April jobs report clearly showed little job growth over the last several months. Given that the market has now absorbed negative jobs data on a weekly basis for nearly a month, it is unlikely that similar data will cause a big move. The April report was also largely in-line with the new and lower estimates for job growth after previous disappointing economic reports as well.
The only other major piece of negative news that has continually caused a sell-off besides the jobs data has been the spike in Spanish yields several weeks ago. The sector hardest hit by concerns over the European debt crisis has been the financial sector, with banks such as Citigroup (C) and JP Morgan (JPM) hit the hardest.
Given that the Spanish yield spike showed the limits of the LTRO program, and the recent news that JP Morgan had a nearly 2 billion dollar trading loss this past quarter, it is hard to imagine any new and worse economic or financial news that directly effects these banks coming out in the near-term.
Finally, another sign the market may bottom is the strong volume that the market has seen during the last week. While volume levels have been anemic most of the year, and particularly low this month, usually at the end of the sell-off you will see significantly above average volume.
While stocks such as Microsoft and Intel sold-off and bottomed on volume nearly 30% higher than these companies daily averages, financial stocks such as JPMorgan and Citigroup sold-off on around 30% greater than average volume on Friday following the story of JPMorgan's huge trading loss. JPMorgan sold-off nearly 10%, with 217 million shares traded, nearly seven times more than the company's three month average of around 35 million shares a day.
To conclude, buying during times of weakness in the market is always hardest. Still, with the U.S. economy still expanding and rates likely to remain low, many companies with stable business models and dividend payouts of 3-4% a year will likely remain appealing to investors.