Fear And Uncertainty Hamper A Quick Turnaround In Stocks

For those investors who thought there might be a quick V-bottom recovery in the markets like we saw last October, they have been sorely disappointed. Last week, the Dow Industrials fell -3.2%, the S&P 500 large caps fell -3.4%, the Nasdaq was down -3.0%, and the Russell 2000 small caps dropped -2.3%. From a technical standpoint, most chartists agree that much damage has been done to the charts and the market seems quite vulnerable and likely to retest lows. Market breadth is poor. And from a fundamental standpoint, the list of concerns is long.  Nevertheless, it seems to me that on balance there are more reasons for U.S. stocks to rise than to fall over the next 12 months, with solid comparisons being made to price action and market conditions in 1998. I am not suggesting that new highs on the stock market are imminent, and indeed a breakdown below the October lows is a definite possibility in the near term. But in the longer term, the odds are strong that the global ship will be righted, with the U.S. at the helm, and corporate revenues and earnings will eventually lead stocks higher.

In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.

Market overview:

Where to start? How about this. I have been doing quite a bit of traveling over the past five weeks, speaking with financial advisors in support of First Trust Portfolio’s launch of the unit investment trust that tracks Sabrient’s first mid-year Baker’s Dozen portfolio (we have been publishing a January top picks list since 2009). My latest travels have taken me to all four corners of the nation, from Orlando to Seattle to San Diego to Hartford, CT, plus Chicago and Philadelphia. And my colleagues have helped fill in when I couldn’t be two places at once, including Buffalo, Minneapolis, Little Rock, Cleveland, San Francisco, Tampa, and Charlotte. The reception from the advisor community has been overwhelmingly supportive, and it has been a pleasure to meet you all.

Of course, the level of trepidation regarding the market is high, and diverse views as to the overall direction abound, from new highs coming to the start of a bear market. Although the majority seem to view the recent market weakness as a long-awaited buying opportunity (a second chance, if you will), there are definite pockets of fear and loathing. Some think we are entering a cyclical bear within a longer-term secular bull market, and then there are those who view the past 6-year bull run as nothing more than a cyclical bull within a longer-term secular bear market.

In times like this, the various talking heads get a lot more air time, and advisors have been trotting out names like John Hussman, Nouriel Rubini, Jim Rickards, and Robert Shiller on the bear side, and names like Lee Cooperman, Jim Paulsen, Brian Wesbury, and Adam Parker on the bull side. Hussman says that the latest pullback was due to overvalued, overbought, overbullish conditions being joined by deteriorating market internals (i.e., more risk-averting than risk-seeking) and it was probably just a start of bad things to come. On the other hand, Wesbury asserts that recent data on auto sales, housing, initial claims, inventories, and investment point to improving GDP growth for Q3 while incomes and spending go up and corporate cash flow is at a record high. And Paulsen observes that historically, when commodity prices collapse in the middle of an economic recovery, usually what follows is an acceleration in economic growth, while recession risk is greater after a surge in prices. Cooperman says that bull markets have never ended before a single Fed rate hike. What to make of it all?

Without putting my own spin on all of the various scenarios and rationales, let me for a moment comment on the bigger picture, beyond all the data and charts. That is, all of us around the world are in this together, and the onward progression of globalization is making it more so all the time. Today, we are seeing synchronized global policy stimulation comprising QE and rate cuts. Everyone in the G20 is essentially working to move in the same direction, and that direction calls for economic expansion and growing asset values across the board. There is little in the way of a zero-sum-game mentality anymore in which one country feels it must undercut another in order to achieve prosperity for its hungry masses at the expense of its neighbor.