The downside gained more traction on Tuesday after the S&P 500 Index rose to 1388 intraday only to close down on the day at 1374. The intraday swing of gaining 1% off the lows only to give it back before the close shows the indecisive nature of the markets for now. By the end of the day it showed me the sellers are still in control of the direction currently. My question is simple… can the market stage a rally or at the least a bounce off support? Is there enough interest in this current market environment to step in and buy stocks regardless of the supporting data? A bounce may be all we can hope for short term or at least until the supporting fundamentals offer a more substantial turn to the upside.
Telecom is one sector that has been of interest during the recent selling. IYZ, iShares Telecom Sector Index ETF has retraced 50% of the gains off the June lows. The sector has accelerated to the downside as the leadership in the sector has equally disappointed on the downside. AT&T and Verizon have both dropped more than 10 percent since hitting the highs in October which puts them in correction mode. American Tower and Sprint have been the strength of the sector holding their respective gains. The P/E ratios are on the high side across the sector, and if the growth picture for the economy continues to be on the weak side, you can see the justification in the selling on a valuation basis. The dividend buying over the past year has helped the upside move in both AT&T and Verizon, with both continuing to yield over 4 percent. As said, this is still one of the sectors to watch should the broad market find a way to sustain a rally into year end.
Financials are another sector to watch moving forward. The stocks have held up better overall with XLF, SPDR Financial ETF dropping just over 6 percent during the same time-frame as the telecom sector above. Less drop would give you the impression of less upside in the sector on a rally. The underlying fundamentals have been improving, but they have struggled to meet investor expectations. As we discussed on our notes yesterday the P/E is near 12 overall. The banking ETF (KBE) is at 11 with the recent pullback test, and the insurance ETF (KIE) is trading at only 9 times earnings. The valuation is on the cheap side if earnings can hold up or increase going forward. If the broad market finds the necessary catalyst to move higher this is one sector to watch going forward for some additional leadership.
The global markets have mirrored the US ups and downs of late. EFA, iShares MSCI EAFE Index ETF broke near term support at $52.80 this week, but is holding above the 200 day moving average for now. The downside move has been in the 6 percent range off the recent highs. Europe’s ETF (IEV) has done very similar. The emerging markets ETF (EEM) is off only 4 percent for the same period. China has recently pulled back 5.6 percent, but still has an upward bias near term. There is still plenty of concern relative to Europe and the outlook for growth, not to mention the sovereign debt issues in Greece and Spain. Still plenty of nerves to go around in the global markets, but equally there are investment opportunities. Watch to see how this unfolds in the coming weeks relative to the bounce or rally in the broad markets.
The safety of running to bonds puts them squarely in the cross-hair of the opposite impact of a rally or bounce in stocks. They will pullback or correct if the optimism gains a foothold short term. Thus, you have to watch the downside risk of owning Treasury bonds and other high quality fixed income. High yield bonds which have moved lower on the recent selling in stocks would stand to rally back with a positive move in equities. This is an area to use stops or sell the positions with the short term gains of late. Measure the risk you are willing to accept in these instruments going forward.
The key is patience… I know that is one of my favorite phrases to throw out when discussing the market overall, but in times like these you can’t really hear it enough. You can always make up for lost opportunities, but you will never recover lost principle. Focus on the risk you are willing to accept and look for the best opportunities going forward.