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Stocks Will Bottom When…

Daily State of the Markets 
Friday Morning - September 23, 2011

Publishing Note: I am traveling on Monday morning and unless something extraordinary occurs, I will not publishing a report. Daily State of the Markets reports will return on Tuesday.

Good morning. With the S&P 500 now down -17.6% from its April 29th high, EAFE about -27% off its high, the emerging markets index sporting a fall of -30%, and the EU having dropped -36% from its high-water mark this year, it is safe to say that the current market is something more than your run-of-the-mill corrective phase. And yet I continue to hear people treating it as such.

I continue to hear about the great values that are out there in the stock market. For example, I saw a stat yesterday that more than one-half (52.6% to be exact) of the stocks in the S&P 500 now pay dividend yields that are higher than that of the 10-year Treasury Note. I continue to hear that investors are overreacting and that the selling is emotional. (To which, I'd first like to ask how exactly one knows if a computer is emotional or not?) And I continue to hear that investors shouldn't panic.

On that note, everybody has probably heard that "it doesn't pay to panic" in the stock market. And I'm guessing that most investors have watched Jim Cramer reinforce this idea by ranting and raving about the lunacy of selling into a decline. (Never mind that fact the Mr. Cramer runs a portfolio that is nearly always fully invested.) Thus, nobody wants to be the "dummy" that panics out of his stocks, gold, or emerging market holdings right now.

However, a key point to remember is that de-risking your portfolio in response to or better yet, in anticipation of, a darkening macro picture isn't a sign of panic - it is actually a logical way to manage the risk of the overall environment. Sure, you probably won't get the timing right and you might feel stupid for a spell. And I can tell you from experience that de-risking isn't always fun (did I mention you might look/feel stupid?). However, I know for a fact that the big hedge fund managers are de-risking their portfolios. For example, David Tepper has talked about his high cash position recently and Barton Biggs of Traxis Partners - a global macro hedge fund - said today that he is currently 20% net long and wishes he was zero. Yet the general public continues to be told not to panic, that selling is stupid, and that the bottom is here.

Although I am a charter member of the glass-is-half-full club, I believe it is important to understand that stocks are going down for a reason right now - a very simple reason: The economies of the globe are slowing. So, you can talk to me all you want about how great values are and the fantastic earnings that will be reported in the coming quarter. The fact that things are slowing down means that stocks will trend lower until traders perceive that the economies of the world are about to improve.

It is also important to understand that stocks don't bottom when everyone under the sun is looking for the low. This is a buy-the-dip mentality, which was born in the 1990's and appears to be making a comeback now. In all fairness, this is a great strategy to implement if you are a long-only fund manager or if the market is in a normal pullback. But if you are in a worsening, macro-driven market, trying to call the bottom can be hazardous to your portfolio's health.

Don't get me wrong; this is not 2008. But it isn't last summer either. There doesn't appear to be a magic bullet out there at the present time unless the G-20 decides to bail out the Eurozone over the weekend. No, in this environment stocks bottom when people give up. And while I will admit that some of the selling over the past eight weeks has appeared to be emotional at times, I also don't hear a lot of people giving up on the stock market.

Yes, stocks can rally and they may even rally today, or the next day, or the next. And I wouldn't rule out another trip through the trading range or a nice year-end rally. But until the economies of China, the Eurozone, and the U.S. can perk up and/or until the kiddies in Washington can learn to play nice, the current environment is likely to stick around for a while. And for those of you who feel compelled to look for a bottom, remember, stocks bottom when no one is looking - including you and me.

Am I guilty of being too negative here? Perhaps I am. And on that note, I have asked a couple of my colleagues to try and keep me in check by alerting me to any and all good stuff that I might be missing (I WAS IM'd with the LEI today). But until I see some of that good stuff happening (or my models tell me the coast is clear), I'm going to continue to manage risk and remain cautious.

Turning to this morning... Although the G-20 has pledged support and the IMF is looking to boost its crisis-fighting assets, word that Greece's Finance Minister laid out three options for the country, two of which included defaults, has rattled the markets again this morning. So far at least, it looks like another weak open. However, traders may recognize that there is a chance of the much-talked about coordinated intervention over the weekend, so be alert for hints, rumors, or news on the subject.

On the Economic front... There are no releases scheduled before the bell.

Thought for the day... Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

 

  • Major Foreign Markets:
    • Australia: -1.64%
       
    • Shanghai: -0.40%
       
    • Hong Kong: -1.36%
       
    • Japan: Closed
       
    • France: -3.05%
       
    • Germany: -3.46%
       
    • Italy: -2.69%
       
    • Spain: -2.39%
       
    • London: -1.83%

     
  • Crude Oil Futures: -$2.06 to $78.45
     
  • Gold: -$49.50 to $1692.20
     
  • Dollar: higher against the Yen, lower Euro and Pound
     
  • 10-Year Bond Yield: Currently trading at 1.699%
     
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -14.71
       
    • Dow Jones Industrial Average: -136
       
    • NASDAQ Composite: -31.59

 

Wall Street Research Summary

Upgrades:

  • VF Corp (NYSE:VFC) - BofA/Merrill
     
  • Apple (NASDAQ:AAPL) - Target increased to $555 at Barclays
     
  • Nuvasive (NASDAQ:NUVA) - Barclays
     
  • Royal Dutch Shell (RDSA) - Benchmark
     
  • Texas Instruments (NYSE:TXN) - Caris
     
  • Cepheid (NASDAQ:CPHD)- Goldman
     
  • Myriad Geneitcs (NASDAQ:MYGN)- Goldman
     
  • Thermo Fisher Scientific (NYSE:TMO)- Goldman
     
  • Total System (NYSE:TSS)- JMP Securities
     
  • Pandora (NYSE:P) - Morgan Stanley
     
  • Enbridge Energy Partners (NYSE:EEP) - Morgan Stanley

     

    Downgrades:

  • Goodrich (NYSE:GR) - Barclays
     
  • Edwards Lifesciences (NYSE:EW) - Barclays
     
  • Cavium Networks (NASDAQ:CAVM) - Deutsche Bank
     
  • Quest Diagnostics (NYSE:DGX) - Goldman
     
  • Triquint Semiconductors (TQNT) - Pacific Crest
     
  • PepsiCo (NYSE:PEP) - Stifel Nicolaus

     

    Long positions in stocks mentioned: VFC, AAPL

    For more of Mr. Moenning's thoughts and research, visit StateoftheMarkets.com

     


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