Everyone Talks, Price Screams

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I am sure you all have a particular pundit or newsletter writer you follow. There are a ton of people that will give you their opinion for the low annual price of $______. “If I give you just one winner a year you will more than pay for the annual fee” is a common sales tactic in such models. 

CNBC has a ton of articles every day and there are hundreds of links you can visit on our site offering “unique” insights. What is it you are looking for: entertainment, wisdom, a game plan? If you have read pretty much anything over the past several weeks it has been all doom and gloom. Certainly, the markets are off their highs, but the S&P 500 was up close to 7% at the close of business last Friday. Yack, yack, yack is pretty much all you are going to get from the vast majority of “experts”. At the end of the day you have to ask, am I getting paid for paying this guy?

Each week I attempt to give you a read of what is going on in the markets from a technical perspective and give you a read on the Leading Economic Indicators. Over the past several weeks I have tried to stress that if you own stocks boot the ones that are rolling over and keep the performers. In that process you have weaned your portfolios of names that don’t deserve continued membership and kept the names that are earning their keep. Sounds like a sound plan to me. One of the real goals is to avoid the yeah buts. Stock XYZ missed earnings and is crashing through support—it should be sold. Yeah but...

Yeah buts come in the form of nonsensical comments that sound intelligent but are often just ways to avoid making a decision. It’s cheap, I like management, it has good cash flow, I made money on it before, I’ll hold it until I break even, are common yeah buts. Those things sound like they make sense. But, are we sure they are highly correlated to the price of the stock going higher? We buy on price and we sell on price. So, price should be a primary motivating factor to what we do. 

If you based your thinking on what you have read over the past several weeks you’d be in a bunker eating saltines. There is a research piece from a highly respected firm that I read every day. I read them because they have a very clear methodology that they employ regardless of the market environment. They were out in front in calling for this most recent pullback and I used their work to raise cash in my portfolio. Today they issued a report that clearly signaled that the intermediate-term trend in the market moved to a buy. This is based on their metrics and it is a cut and dry system. Ironically, their response to this signal was to, instead, remain negative and simply ignore the green light. They pointed to another reading and said that overrides the turn in the market. I have followed this report for over a decade and never seen this happen before. Why is everyone so bent out of shape? Why is everyone so pessimistic? It is the middle of June and the S&P 500 is up over 6% year to date. Obviously there are real issues that we all face. But, what the heck do we expect? No one said it is going to be easy. Am I the one that is missing the big picture here (wouldn’t be the first time)? 

A good portion of my day over the past several weeks has been spent searching for that piece of the puzzle that I am clearly missing. For a good portion of my career a 5% pullback in the market led everyone to buy, buy, buy. A 10% correction was the opportunity to load up on a bunch of new winners. Now it is a sign of the “next 2008”. I am not going to suggest that I am always right but here is how I see things based on the tools I have used for many years and let’s see what we come up with. 

From a technical perspective the markets acted quite well last week. Clearly a technician is going to simply ignore all the Europe related factors that drove things last week. I gave you the following short term levels as resistance for the major indexes 1336/12,615/2885/780 for the S&P 500/Dow/NASDAQ/Russell 200 respectively. The S&P 500 and Dow surpassed those levels on a closing basis Friday and as I write the NASDAQ is just above that level. The small cap Russell 2000 is within striking distance. If the Russell 2000 and NASDAQ can’t close above those levels over the next few sessions a negative divergence will develop and we could see a selloff. The support levels remain 1300/12,350/2800/750. Also, I have stressed that you cannot remain focused solely on the levels of the indexes. Each stock in this market is its own version of crazy. Boot the names that break down—there are many—and keep or add to your winners. There are many stocks that have continued to offer superior performance in these volatile markets.

Let’s look at the economic side of things. I do not go too deep into this because the next good stock tip I get from an economist will be my first. When we got a bad jobs number a few weeks ago the headlines screamed recession. There are some things I like to look at to see if I can perhaps see where the market is going to be a few months down the road. Inflation readings have declined for several months now. Also, there has been a large stimulus to the economy in the form of lower borrowing rates. The economic series that we look at have declined over the last few months. But, these series look just like they did prior to big moves higher in the market in each of the past three years.

I am not giving the all-clear by any stretch of the imagination. Also, I am not giving the throw in the towel call either. There are a lot of stocks that continue to perform. In a slow growth environment those companies that continue to provide consistent earnings growth are bid higher. Today in a flat market the winners continue to provide leadership and the laggards continue to be sold off.

To sum it up, I guess I am going to have to sound like a broken record. The economic numbers reflect a lull in activity as we reach mid-year, just like each of the past three years. There are also signs that inflationary pressures are easing. In this type of environment the best companies can use these cost savings to continue to beat earnings. From a technical perspective the long term position of the market is still not great. That is why I have been adamant in telling you to sell the weak names in your portfolios. Those names will continue to get hit. Hold on to the winners. At this juncture you should have a series of strong performers and some cash available to take advantage of what is working in this environment. 

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About Thomas J Smith CFA