Multi-Month Price Consolidation in the Cards
There still is no real trend in the equity market. One day, stocks sell off big-time; the next, the S&P 500 and Dow Jones Industrial Average hit new record-highs.
This is a very tough market to figure; anything can happen when monetary policy is highly accommodative.
A lagging NASDAQ Composite isn’t a worry. Neither is the Russell 2000 index. Stocks won’t come apart so long as so many large-caps are pushing their highs.
And not all technology stocks are retrenching, either. Some of the old technology bellwethers are actually doing quite well these days. Microsoft Corporation (MSFT) is trading right at a multiyear high, with a 2.8% dividend yield and a forward price-to-earnings ratio of approximately 14.
Even Intel Corporation (INTC), which is having a pretty tough time generating much in the way of top-line growth, is recovering on the stock market and is very close to breaking out of a multiyear price consolidation. Intel currently offers a 3.4% dividend yield and is not expensively priced.
One day, stocks are reacting to geopolitical events in Ukraine; the next, it’s Chinese economic data, then it’s mergers and acquisitions…
If anything, the reaction to first-quarter earnings was pretty muted. But even though the beginning of the year started out with considerable downside, stocks recovered strongly after policy reassurance from the Federal Reserve. While the action’s still choppy, underlying investor sentiment is holding up.
This is a market that continues to favor existing winners, but not necessarily at the speculative end. (See “Risk vs. Reward: Is It Time to Cash Out of This Bull Market?”) The reticence that launched blue chip stocks higher in early 2013 has returned, and the rotation isn’t a reflection of an unwillingness on the part of institutional investors to be buying, only that the herd decided it was time to cash out of the market’s riskier stocks.
Still, caution is the name of the game in this market. The economic data of late haven’t been robust and many indicators aren’t able to beat existing consensus.
A recession is very much a possibility within the context of a secular bull market. But corporate outlooks are still quite positive, especially going into 2015, and balance sheets remain in excellent condition.
This is a market in which you shouldn’t let anyone sell you something. It’s time to be reviewing portfolio risk and identifying the names you’d like to own if they experienced a major price retrenchment.
In order for a material price reversal to occur in stocks and investor sentiment, a shock would have to disrupt this market. It could come from geopolitical events or even a change in monetary policy, which has kept the cost of capital artificially low for too long.
Equity leadership from the NASDAQ Composite has disappeared, and it’s a reflection on the part of big investors to choose safety after stocks went up tremendously (2013) and of a global economic recovery that’s tenuous at best.
A multi-month price consolidation in is in the cards. The resilience in equity prices, however, is surprising.