Have We Bottomed Yet?

That should be the question in every investor's mind now, after a Fed-inspired run in the stock market over the past couple of weeks (post Bear Stearns (BSC)).

Home stats showed there might be some perk up in activity after a prolonged slow down, though job loss indicators did not indicate any meaningful reversal of trends. Confidence indicators and economic stats across Europe (notably Germany) indicated that the situation is not as bad as it was thought - adding to selling pressure on the US dollar.

Are we at a bottom yet? I would presume no. There have been certain sectors like Financials and Homebuilders which have been beatee so badly that they were bound to bounce back a bit at least...especially after the beating Financials took around the $2-a-share-BSC playout. Stocks like Citi (C), Lehman (LEH) and JPMorgan (JPM) all had a pretty good run, and the overall DOW (DIA) indicator is back to the 12,600+ levels. However, the current earnings season underway would probably confirm that growth has indeed slowed down and earnings momentum has been negatively affected across sectors.

The after-effect of the financial squeeze/credit crunch is only starting to show on downstream sectors and it would take a few quarters to say we are out of the woods yet. This earnings season, Manufacturing should slowly start showing kinks in the armor and Tech should re-affirm medium-term demand weakness. This would definitely cause a pull back to the 11,700-12,000 range in the next few weeks.

I am bearish on manufacturing and energy stocks at this point in the economic cycle. Stocks like Chesapeake (CHK), for example, had a pretty good run...akin to the run heady commodity stocks like Goldcorp (GG) had in the commodities upswing rally. Demand weakness would slowly start to re-affirm very soon and valuations will take a beating. In Financials, there are stocks like Merrill Lynch (MER) which have not been punished fully yet; as the Wachovia analyst rightly pointed out, I think there's more downside to MER at this point since their exposure to this whole subprime thing is probably highest after C and BSC.

If you want to play short-term, the best play in this market is to bet against some Financials (SKF) which have rallied heavy and bet for some retail (Crocs (CROX)?) and pharma stocks (Schering-Plough (SGP) ?) which have been relentlessly beaten up. Be long on Financials long-term though, getting in during down-turns in the market cycle. And, I would be positively short on energy stocks at this point.

Comments

[cheesecake]

excellent article. my thinking is running close to yours.

[Vancan]

Disclosures?

[raja]

These financial companies are begging at the Fed Window daily for day to day survival. Then they have the temerity to tell us that we are in the final innings of the credit crunch.... only that the final innings is a long one - that will be extending for more than a year, and the after effects for another couple of years. Some have even gone to Tokyo with their begging bowl, as if to indicate that they cant get enough alms at the Fed window.

[ota]

oops oil is actually still strong and I don't think you'll see a sustained bottom till next year.

[steve west]

you cant say we have lower to go in financials and the market yet be bullish on retail.. it just does not work that way.
I think we have bottomed and I am long retail

[dancing diva]

You make too many blanket statements - especially being short or picking a top on energy stocks. There are many out there where valuations are still cheap, especially in the service sector.

Additionally, you suggest picking bottoms in beaten up stocks because you have no confidence in the stock markets bottom and think they would fall less? If you have no confidence, just stay out.

Remember, traders/investors who try to pick the top or bottom of the market are called heroes - because they are the first to perish.

PS - I am long crox (and have been buying it for the past three weeks), but on valuation. There are plenty of cheap plays around. Rather than this inane article, do you homework and don't waste our time with stupid generalities.

[bearfund]

Short oil? Why, did they start making more of it? As a short-term trade on high prices and macro risks to demand, maybe. Long-term, no way. The best long-term investments are in food and energy. Arable land and oil are in finite supply but humans are not.