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World
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Nasdaq 100
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Russell 2000
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Markets ran in place this week as news was sparse. Weakness in the commodity complex and uncertainty over Europe's handling of Greece debt continued to weigh on risk assets. Stocks began the week snapping back positively from the prior week's commodity-based selloff. As commodities recovered a bit of their recent losses, so too did stocks. Monday and Tuesday sported decent gains with the Nasdaq Composite up a full 1% on Tuesday as Microsoft agreed to buy communication pioneer Skype for $8.5B in cash. The bullish mood was checked quickly, however, as the bears easily regained the upper hand Wednesday. A report from China showing slowing industrial production led to a resumption of the selloff in commodities with the complex largely erasing the gains of the prior two days. Energy and materials stocks - market darlings throughout the fall's stock rally - saw heavy selling as well with both sectors down around 3% for the day. The selling carried over into the first hour of Thursday trading with China again setting a somber tone as their central bank announced their intent to raise reserve requirements yet again. But after the first hour or so, buyers stepped in to stop the downturn and push stocks higher throughout the day to finish with modest gains. Positive GDP data out of Hong Kong and Europe kicked off Friday's trading, but investors greeted the news with a sour face, preferring caution above all else. Stocks fell across the board with the Nasdaq's 1.2% loss leading the pack. Stepping back, defensive sectors continued to shine with utilities, healthcare, and consumer staples sporting near 2% gains each while consumer discretionary stocks also held up well. The more heavily cyclical sectors, however, plus financials continue to be under pressure as investors worry over whether the global economy will be slowing down in the coming months.
For the week, the Russell 2000 (IWM) added 0.29% while the S&P 500 (SPY) and Nasdaq 100 (QQQ) dipped 0.12% and 0.10%, respectively. All three ETFs remain above both their 50-day and 200-day exponential moving averages (EMAs).
Continued U.S. dollar strength pushed our World portfolio to a 2.51% decline on the week. The portfolio consists of the 5 top-ranked world ETFs as of April 21, the beginning of the current 4-week holding period.
Both our Classic and Turbo Models remain on Buy signals
Market
State
Markets rarely offer us a smooth sailing forward view. Instead,
we are having to ponder all our charts, gauges, and radars to try
and understand how choppy or benign the seas ahead might be. Coming
into this month, stocks were generally acting positive, but not
by much, and certainly not across the board. Since a rally in the
first six weeks of the year, stocks have made little progress overall,
rising to new highs recently in some indexes while others languish.
Of note, the king of the "languishers" has been emerging
markets which spent November through March bouncing around in a
channel before apparently breaking free in early April. However,
emerging markets have failed to build on this April success. This
week and last have seen commodities get pounded on fears of slowing
demand and abundant supply. Those fears have potentially undone
the April breakout for emerging markets.
Along
with the lack of follow-through in emerging markets has been a rolling
over of all things energy and commodity-related. After a nonstop
move upward from September to March, energy stocks have been digesting
those gains and appear ready to give some back. The plunge in oil
and silver prices follows weakness in copper prices that actually
began in February and has accelerated over the past couple of weeks.
This weakness suggests a global economic picture that is less robust
than markets had priced in. This week, steel giant Mittal issued
a quite bullish report regarding steel demand going forward. However,
that good news has done nothing for the stock further demonstrating
investor's reluctance to raise their own expectations.
Further dragging on stocks has been the chronic underperformance
of financial shares. With banks still working through home foreclosure
issues, most investors see a sector that has yet to get back on
solid ground. Compounding domestic bank hurdles has been the slowly
escalating problems in Europe with excessive sovereign debt burdens
in Greece and Portugal. The chart below shows how the credit markets
continue to request more compensation for buying the debt of weaker
Euro economies. Indeed, the price requested is now well above the
elevated levels that contributed to last summer's market correction.
Chart 1: Last year, Eurodebt worries triggered market correction
Given this menu of worries, what could possibly be supporting our
current Model Buy signals? A short answer could be: almost everything
else! Technology, consumer, industrial, and broad domestic stock
indexes all remain flat to modestly trending upward. The Nasdaq
Composite
is barely 1% removed from its post-recession highs. Cyclical sectors
such as industrials and consumer discretionary are also within spitting
distance of new highs. More conservative but telling investment
vehicles such as preferred stocks, high yield bonds, and even high-dividend
stocks continue to move upward as if oblivious to the concerns hampering
commodities and some non-U.S. markets.
Chart 2: While emerging markets struggle, other risk investments
march higher
In the end, we are left with the typical muddy picture - some things
good, some bad. We continue to believe that the secular growth story
of China is a major force behind market strength or weakness. The
Chinese have aggressively sought to dampen their economic growth
to prevent inflation from getting out of control. A report this
week suggested they were having some success in that effort. The
markets took that news badly, however, as a further sign that future
commodity and industrial demand would slow. Whether this weakness
begins to affect other market sectors is what our Models are watching
for. With the Nasdaq holding up just fine thusfar, there's no reason
to consider this weakness in commodities as anything more than a
shift in money from one sector to another. That can change quickly
and bleed into the broader market, especially in the seasonally
weak early summer months. Thankfully, our Models are poised to keep
us informed when that condition changes and offer us far smoother
sailing than most other investment strategies.
Question:
what's behind Citicorp's recent reverse stock split?
The stock market is geared toward stocks priced within a certain
range. Looking at the stocks in the Dow Jones Industrial Average,
we find an average stock price of $55. There are no stocks in the
average below $10. For most mutual funds and many institutional
investors, there are restrictions against buying stocks below $5
in price, and perhaps some with restrictions on shares below $10.
Thus, companies have a very strong incentive to keep their stock
price above these figures. Prolonged periods spent below these thresholds
diminish the investor pool available to a company and place a further
hurdle on shares moving higher. Or, as in the case of Citicorp,
can turn its stock into the province of short-term, active traders
who seek to gain from small $ moves in the stock price. This "hot"
trading activity also serves to keep large institutional investors
away.
This week, Citicorp (symbol: C) addressed these concerns by reverse
splitting their shares 10 for 1. Thus, for every share owned by
an investor, they will receive 1/10 of a new share. The price adjusts
to keep everything even. Thus, 10 shares of the old C trading at
$4 becomes 1 share trading at $40. Suddenly, Citicorp's shares become
a possibility for institutional investors and become less attractive
for hyperactive day traders. .
Warm wishes and until next week.
The TimingCube
Staff
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