The market is going straight down. While the S&P 500 and its tracking exchange traded fund (SPY) have rallied nearly 20% from the market's summer lows of last year, with stocks such as Apple (AAPL), up over 40% in the past year, the last month has been brutal.
I had a mixed call last week, suggesting we would likely get a relief rally followed by a bigger decline. While the market rallied on Monday before falling significantly over the course of the rest of the week, I thought the market would obviously rally more than 1 day.
With the economic data beginning to deteriorate at the end of April, the recent jobs reports and manufacturing and service data coming from Europe and China have been horrible. Still, given that most of the broader indexes had one of the markets' worst weeks of the year, I think its interesting to see what the next move may be.
1. I don't think the market will continue to sell off hard, because of a short-term peak in bad news.
The recent PMI data coming from China was very poor, but leading economic indicators in China, such as electricity usage, trade data and housing data, have been poor for some time. Obviously, the economic data in Europe has remained weak for some time as well. The recent jobs report was also the most important of a number of poor jobs reports that have come out over the last month.
Still, the U.S. economy continues to grow at 2-2.5%, recent auto sales numbers were reasonably strong, but below expectations, and the recent economic data was not a surprise. The economic data in the U.S. has held up reasonably well, and the recent earnings reports from Citigroup (C) and JPMorgan (JPM) also still showed a significant expansion in debit and credit card transactions year-over-year and compared to the 4th quarter.
2. The second reason I think that most of the broader indexes will stabilize this week is a short-term bottom in the financials. While the recent economic reports have been fairly poor, the recent massive trading loss reported by JPMorgan marked a short-term peak in bad news for the financial sector, a previous market leader. Financial stocks such as Citigroup have been weak since JPMorgan reported that loss several weeks ago, but these stocks have generally declined only modestly since that news broke.
As we can see, while financial stocks have performed horribly during the recent sell-off, these stocks generally bottomed after the JPMorgan report, and have sold-off only modestly over the past several weeks.
The financials have been hit by the news of the recent trading loss by JPMorgan, poor economic data and renewed concerns over European debt issues. The fact that the market's hardest-hit sector appears to be stabilizing suggests that negative news is reaching a short-term peak as well.
3. The last reason I think the market will likely stabilize this week is the strong recent performance of one the market's weakest performing sectors over the last month, the energy sector.
While the financials have been the hardest hit sector during the recent decline, energy stocks have underperformed the broader indexes by a fairly wide margin as well.
Oil prices topped out at around $110 a barrel in early March, and this commodity has dropped nearly 30% in the last two months, to around $83 dollars a barrel. While oil prices have been affected by geopolitical issues, such as rising inventories and a strong dollar, energy prices have declined massively in a very short-period of time. Demand for energy is still strong; geopolitical uncertainty in the Middle East remains, with elections upcoming in Egypt, and continued violence in Syria.
This is why I thought it was interesting that several key oil producers and oil service stocks actually closed Friday's brutal trading session flat to positive. BP (BP) closed positive for the day, while Halliburton (HAL) closed flat. Exxon-Mobil (XOM) and Transocean (RIG) also closed down less than 1%, significantly outperforming most of the broader indexes.
Obviously BP and Transocean have sold-off recently because liability concerns, in addition to falling oil prices. Still, given the fact these stocks have been the worst-performing names in the energy sector, the recent outperformance of these names was notable.
To conclude, while the market will likely continue to trend down modestly and consolidate in the short-term, shorts have likely overplayed their hand. The fundamentals of the U.S. economy remain strong, and some of the worst performing sectors in the market, such as energy and the financials, are trading near these sector's summer of 2011 lows. European stocks are also trading below these stocks' summer 2011 lows. With major companies such as Chevron (CVX) and GE (GE) now yielding close to 4%, investors will likely be willing to take long-term positions as long as a recession is feared.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.