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Market Update 4/19 - Words Of Wisdom

|Includes: Cameron International Corporation (CAM), CXO, ESV, PXD, RIG, WLL

Words of Wisdom - not from me but from Oaktree capital :

"Most great investments begin in discomfort. The things most people feel good about - investments where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy - are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late."

"Superior investment results can only stem from a better-than-average ability to figure out when risk-taking will lead to gain and when it will end in loss. There is no alternative."

"Unconventional behavior is the only road to superior investment results, but it isn't for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while and survive some mistakes."

I took a good look at those words this week to remind myself the role that "market psychology" plays when trying to achieve better than average results when it comes to investing.. More on that later....

With the recent volatility and intraday swings that we witnessed this week alone not to mention the action during the first quarter, I believe all investors need to take a look at Oaktree's words to reaffirm their plan, strategy and goals going forward. For me its helpful in staying "on track" while avoiding the daily market mayhem.

Last week I highlighted two of the themes that many investment managers are focused on now. Both of those "themes" contend that the market is prime for a sell off this time of the year. Given the positive results produced by the major averages this week, it seems they have been put on the shelf, at least for now.

And now they've rolled out "Sell in May and Go Away" -- It's a well-known market phenomenon that over the past 70 years, stocks tend to perform less well (up only 1.2%) during the May-through-October period, compared with a more robust 6.9% gain during November through April.

What do the present technicals tell us? From an overbought reading of a record 1,897.28 on 4/4 in the wake of a good jobs report, the S&P has fallen by 4.1% to an oversold reading of 1,815 just one week later. At that point everyone who could get to a microphone or write a column was suggesting recession, deep correction and I even heard the word "bear" market thrown in.

Technical support remains near the 200-day moving average of 1,766, just above the February lows. As mentioned last week the bulls don't want to see a breach of those lows which are around the 1735 - 1740 level.

Exactly 4 trading days later the S & P now stands @1,864 a mere 1.4% from its all time high .. The NASDAQ flirted with its 200 day MA, bounced off of that and in a sharp reversal last Tuesday seems to have stabilized. So for the moment all seems well. Even the dreaded Biotech index (NASDAQ:IBB) reversed during this time. I penned an article this past week highlighting Gilead. Suggesting that all biotechs are not the same, as there may be some gems there that are fairly priced in that group that have been thrown away.

As investors constructed this proverbial Wall of Worry over the past month, they have also executed a discernible defensive rotation, by raising some cash & adding to Treasuries. They lowered overall portfolio beta by taking profits in some of the more expensive higher-flying categories, and shifted those equity assets into cheaper and more conservative dividend-paying stocks, such as REITs, utilities, telecoms, consumer staples ( food, beverage and tobacco) and health care ( big drug companies).

That's a fairly typical portfolio strategy to hide out during the uncertain summer months, given the warnings that have been laid out for us. Perhaps many will flip the "risk-on" switch again later in the year, and pile back into the now-cheaper higher-beta growth stocks. Who knows when that may occur.. I'll add a data point to those who are suggesting the "mid term election cycle will cause a large drop in the averages.. And that is "the average return one year later from the low of that "cycle" is 32%."

So, I suggest IF the averages do correct sharply - it could turn out to be a wonderful buying opportunity. Of course, IF and when that occurs, many will be paralyzed with fear and lose sight of their plan and strategy, hence the suggestion to review the words from "Oaktree". Don't lose sight of how market psychology can be a demon at work.

People who worry will say this "market churn" often heralds a change in direction and some are now announcing the next "bear" may be here soon.

I'll gladly take the other side of that argument, given the current technical and fundamental backdrop. A "churn" that doesn't hurt the overall market can introduce the next leg up in a bull trend. So far, as I pointed out, the rebound of last week suggests that may be the case.

And keep in mind, historical studies show that most technical corrections tend to be non-events in a long uptrend, IF the basic fundamentals of earnings and economic growth are intact and stock valuations aren't stretched out. And on that note :

From Thompson Reuters : "We saw the first full week of q1 '14 SP 500 earnings this past week, with the SP 500 "forward 4-quarter" estimate falling to $122.86, versus last week's $123.04.

With the SP 500′s 1.7% gain this past week, the p.e ratio on the forward estimate rose to 15(x). The PEG ratio jumped to 2.25(x).

The "earnings yield" on the SP 500 is now 6.359%, still very elevated relative to the 10-year Treasury yield at 2.72%. For those Fed model followers, stocks remain pretty attractive in terms of relative value to the bond market."

Going into 2014 the most under owned sectors were Emerging Markets, Commodities, Energy , & Telecoms. Investors may find it rewarding to take a good look for value in these sectors.

Money has now started to find a home in these areas as the rebound in EM's has been sharp, and I have seen rebounds in individual names in the other under owned sectors as well. As an example, (NYSE:CVX) has gone from 109 to just under 124 since Feb 1.

The Energy sector has suffered the last two years from negative earnings growth, and negative revenue growth as well, but that may be about to change and the recent money flow could be signaling just that.

The forward estimates are now suggesting the first year-over-year growth for the energy sector in two years, as we move through 2014. The second quarter reports are looking especially strong, although we won't see those earnings reports until mid-July, 2014.

Many of the E & P oil stocks I have mentioned in the past (NYSE:CXO),(NYSE:WLL) both made new highs this week. (NYSE:PXD) has bounced along its 200 day MA and has now risen from 178 to 203 in the last 2 weeks. Despite the positive outlook for energy, I wouldn't chase these names here, but rather would add on pullbacks.

An area within the energy complex that is intriguing is the oil service sector. A complete list of those stocks is here.

These are the companies that supply the industry with goods and services. Many names in this complex have yet to experience that big price move, and are now attractively priced.

(NYSE:CAM) is a name I own (it's also one of my "stocks for '14"). Its up just over 10% when I mentioned it back then. I think it still has upside from the low 60 level - with a price target of 75. I'll be writing a special report on that name in the next day or so.

(NYSE:ESV), (NYSE:RIG) have underperformed since i mentioned them a while ago. I believe if one has a LT view, (of course i mention that since in the short term they have been huge disappointments) there is value in names like those two. I own both and for those that may be new to my blog, I do not suggest a stock that I do not own myself.

Best of luck to all ....

Disclosure: I am long CAM, RIG, ESV, PXD, WLL, CXO.

Additional disclosure: I am long numerous equity positions - all of which can be seen here in this blog .