Last week, neither Fed Chairman Bernanke nor European Central
Bank (ECB) President Draghi committed their respective
organizations to a specific solution to the economic woes of the
U.S. or Europe. President Draghi's firm statement the week before
last that "the ECB is ready to do whatever it takes to preserve the
Euro" lacked substance. Yet, that statement sent the S&P 500
roaring up +3.56% over July 26 and 27.
Doubts over the capabilities of either leader to act crept in
last Monday, as the market was off a very small amount. It got
worse on Tuesday, July 31 (-0.43%), as everyone waited for action
from the Fed, the ECB or both. Instead, Bernanke spoke in
platitudes on Wednesday, August 1, and the market fell another
-0.29%. When the ECB merely chatted about gross generalities and no
certainties on Thursday, August 2, the markets fell globally with
the S&P 500 down nearly -2% by 10:00 a.m., following horrible
markets in Asia and Europe. The realization that nothing was really
happening caused investors to exit "en masse," sending the market
down 20 points.
To make matters worse, the Knight Capital (
) trading debacle on Wednesday, which cost the company more than
$400M, threatened its very survival, as its stock price was down
75% by Friday morning. There's nothing like a rogue trading
algorithm to zap investors' confidence in electronic trading.
Inexplicably, around noon Thursday, retail stores, on the heels
of sordid forward guidance from Abercrombie & Fitch (
) (whose shares fell nearly 15%), announced a surprising +4.3% gain
in July. This figure was nearly triple the expected number.
Combined with Wednesday's positive ADP Employment Report of 163K
new jobs in July, exceeding the consensus of 125K, the tide seemed
to turn. Maybe investors should focus on the reasonable valuations
and ignore the Fed and ECB, assuming that they will eventually do
what they promised.
Optimism continued to abound Friday on better-than-expected
numbers from the monthly employment report (a gain in non-farm
payrolls from the private and public sectors of 335K versus an
estimated 205K), and the market rolled forward to close at 1390.
Unabated by weekend news and political turmoil, the market climbed
very, very close to 1400 before profit-taking sent prices down to a
close of 1394, up yet another 3 points.
So, from a low on July 25 of 1337, the market was propelled by
promises and platitudes to close at 1385 on July 27. The market
then fell back to 1357 on failed promises but gained it all back,
plus an extra 3 points today. Moral of the story: listen to facts
and not promises.
Market Stats: The leader in last week's wild behavior was
Large-cap Growth, up +0.34%, while the loser was Small-cap Growth,
down -1.38%. Large-cap Growth and Large-cap Value have now led the
past week, month, 3-month, 6-month, and year periods. The loser has
been Small-cap Growth for most of the past year.
Another moral of the story is in turbulent uncertain times,
stick with the larger caps. From a sector viewpoint, Technology,
Energy, and Consumer Cyclicals seem to offer the best combination
of value and growth. Finance certainly has bargain prices, but the
faint of heart will likely remember JPMorgan 's (
) Whale trade, Barclays' (
) dally with LIBOR, and Knight Capital's wild computer algorithm
for quite some time.
Here are the market stats.
About 80% of the S&P 500 companies have reported earnings,
and about 66% of those companies beat earnings, while more than 50%
missed revenues. Valuations in general remain quite reasonable, but
if revenues continue to slip, it could be cause for concern. Not
much in the way of economic data this week. Consumer Credit is
tomorrow; Initial Jobless Claims are on Thursday along with the
Trade Balance and Wholesale Inventories; and finally, Import and
Export Prices Friday along with the Treasury Budget. Must we really
hear the Treasury Budget on a late summer Friday?
4 Stock Ideas for this Market
This week, I created a custom search in
, including all large-caps with an emphasis on growth, recent
analyst revisions, and insider buying. Here are four you may find
Cognizant Technology Solutions Corporation (
) - Technology
Western Digital Corp. (WDC) - Technology
NetEase, Inc. (NTES) - Technology
Cummins Inc. (CMI) - Industrials
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
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