Some Sector Thought to Start the Month

The markets continue to move higher and from my view without much in terms of a correction or pullback to test the moves higher. The move is putting a price tag on stocks at levels that introduce more risk to the positions and portfolios. Factor in the trend from earnings the last two quarters… lower revenue growth, and that give fewer choices in stocks that are growing fundamentally. That leads to where we started, stocks are getting lofty in valuations relative to growth. An interesting stat to go with this theme, 57% of companies reporting their Q1 earnings beat expectations, but only 41% exceeded revenue or sales expectations. This is a trend to watch as we go forward and the risk/reward variable plays out. Respect the upside trend, but protect your downside risk.

The Federal Reserve (FOMC) meeting concludes today. Not much is expected to change relative to the stimulus of $85 billion per month. With inflation under control, job growth slowing and economic reports that show slowing growth across the board, the Fed will not make any significant changes to the current path of financial destruction. There will also be news from the ECB (European Central Bank) on rates in the euro nations. The expectation is for a rate cut. If it does not materialize… watch for a negative reaction in Europe. Two key decisions for the markets that should be routine, but then you never know exactly what will come out the mouths of these leaders. Watch and see how if it plays according to plan.

I have been reading plenty of reports which state the investor is getting fearful of a collapse in the markets again. Really? Where does that show up in the recent trading activity? The VIX index is at 13 which borders on lethargy. If there is fear building the only indicator that shows this is the charts of the 10 and 30 year treasury bond. The yield on the 30 year bond has moved back to 2.8% after moving above 3.2%. When bond prices go up, yields go down, and what drives prices up is demand from investors. Thus, maybe bonds are once again acting as an indicator or barometer for investor fear more than the VIX index. If fear is building, the downside risk of the current environment is dangerous to hang around without making exit plans. Take the time to determine where and how you will protect your portfolio in the event of a downside move in the broad markets, and when you will make the responding moves.

The Healthcare sector has been showing some signs of weakness during the Q1 earnings reports. This has pushed the index lower off the recent highs and made investors tentative about putting money to work in the sector. The result has been some rotation to other opportunities. Pfizer is the latest to disappoint in the sector on Tuesday. Both revenue and earnings fell short of expectations. Reading through the report there are plenty of reasons for concern looking forward, but if you are a long term investor in the stock it offers plenty of reason to like the stock. Perspective is the key to evaluating this particular stocks. But, the concern is the sector impact. The negative press is hurting the healthcare sector now and we need to know at which point we would head to the exits or hedge our positions. Watch the downside risk in this sector short term.

Another sector getting bad press from Q1 earnings is consumer staples. The miss by GE and PG added some pressure on the sector short term. In both cases the stocks are good companies long term, but the current short term views are not helping. This is another situation of knowing why you own the sector and determining your downside risk. The earnings as stated above are okay, but the revenue is not matching up to expectations. Growth is a problem across the market currently and thus, set your stops and manage your risk accordingly. Know where your exits are if the downside picks up.

May promises to be interesting as the April data will confirm the slowing numbers for March, or we get some type of improvement that sparks the rally further. I would like to believe in the upside story and growth improvement, but it isn’t looking good for April to have improved. Watch the data the balance of this week for more insight into the outlook for growth. Take what the market gives, but maintain your discipline and plan your exits before the selling starts.