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Stock Market Rotation: Clear as a Bell

When I was a rookie stockbroker 35 years ago, my manager constantly reminded me “nobody rings a bell at a stock market top or bottom.”  That may be true, but events over the past week have me wondering if I am hearing bells in my head.

In no particular order, here is a short list of data points that emerged during the first week of October that have the stock market beating a hasty retreat:

  • The yield on the 10-year Treasury note climbed above 3.2%, its highest level in more than five years;
  • The price of a barrel of oil rose above $75 for the first time in nearly four years;
  • The VIX, or “fear index”, jumped 50% to its highest level in six months;
  • The ratio of companies guiding lower instead of higher for the next set of quarterly results is higher than it has been in over six years; and
  • The number of new jobs added to the non-farm labor force in September came in far below expectations and at its lowest level in a year.

Add it all up, and you may have the closest thing to a bell signaling a near-term market top. That’s because the five bullet points above, worded differently, have stark implications for the U.S. economy:

  • Borrowing costs for consumers and companies are going higher, leaving less money to spend on goods and services;
  • Energy costs are going up, which are a net negative on the economy;
  • Institutional investors are beginning to get scared that the market may crash and are taking a defensive posture;
  • Businesses are seeing early signs of higher energy, labor, and materials costs that will hurt profit margins in the fourth quarter and want to set analysts’ expectations accordingly so their share prices don’t get crushed when Q4 results come in below expectations; and
  • For the same reasons as above, employers are hiring fewer workers to keep a lid on payroll costs.

Changing of the Guard

That’s the bad news. The good news: stock market rotation, not abandonment, is occurring as a result of these trends.

During the first week of October, the Dow Jones Industrial Average lost only 0.4% of its value in response to this bevy of bad news. Most of the stocks in the DJIA are trading at reasonable multiples to earnings, such as McDonald’s (NYSE: MCD) and Walmart (NYSE: WMT), so shareholders of those companies see no reason to panic.

The S&P 500 Index fell by 1.5% at the same time due to its capitalization-weighted structure. Companies that are more valuable, such as Apple (NSDQ: AAPL) and Microsoft (NSDQ: MSFT), have a bigger impact on how the index performs, which tends to amplify current market trends.

However, the tech-heavy NASDAQ Composite Index dropped by more than 4% over those same seven days as investors closed out positions in overpriced momentum stocks. Amazon.com (NSDQ: AMZN) shed more than 7% of its value, while Netflix (NSDQ: NFLX) fell nearly 8%.

Meanwhile, value stocks are enjoying renewed popularity. Even stodgy old General Electric (NYSE: GE), this year’s “value trap” poster child, jumped 20% during the first week of October after its board took aggressive action to restructure the company.

The outlook for GE was so dismal earlier this year that it was dropped from the DJIA in favor of pharmacy retailer Walgreens Boots Alliance (NYSE: WBA). Now, investors are taking a second look at GE given its cheap valuation and mandate for change.

Of course, one week is far too short of a period to reach any firm conclusions, but investors would be foolish to ignore the warning signs. If you listen closely, you can hear the bell is ringing.

One person who’s adept at hearing market signals is my colleague Linda McDonough, chief investment strategist of Profit Catalyst Alert. With nearly three decades of hedge fund experience, Linda can spot money-making opportunities in any market — up, down or sideways.

Linda applies her insider knowledge to pinpoint nuances in stock charts and financial statements and turn them into profitable gains. She’s about to announce another big trade. To learn the details, click here now.

 


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Stock Talk

Robert Lovell

Robert Lovell

i would appreciate your info and comments on vodaphone and HCLP. i own both and am a elderly income investor.

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