It’s a Traders’ Market with Only a Few Stocks Doing Great

economic healthThe recent stock market rally looks to be running out of steam. Trading volume has been declining since May and this isn’t a good signal. We’ve had a great run since September and we’re due for a consolidation.

Investors pretty much are fully anticipating lackluster economic data well into 2011. The stock market is trading on foreign news now and, to a lesser extent, domestic monetary policy. The Federal Reserve is, however, running out of stimulative options and, while the stock market likes a more accommodating Fed policy, this isn’t necessarily a good thing for the long-run health of the economy.

Trading action in stocks will always be receptive to the news of the day. A great earnings report from any company will see the stock jump. But, in an economic environment of slow growth, it’s becoming more difficult for any industry to generate the kind of outperformance that investors want to pay for. The state of the equity market remains fragile.

It’s definitely a trader’s market and, if you don’t own the right stocks, you are way underperforming. For speculators, the best moneymaking sector has been gold and silver stocks. The best value now for risk-capital investors is in U.S.-listed Chinese shares. Surprisingly, some of the best stock market performances over the last couple of months have been in a handful of large-caps. The stock price of E.I. du Pont de Nemours and Company (NYSE/DD), or DuPont, has been super strong since the beginning of the year. The same goes for Caterpillar Inc. (NYSE/CAT) and IBM Corporation (NYSE/IBM). All three are Dow stocks.

But the good news is few and far between. A lot of other Dow stocks are stuck in the doldrums. General Electric Company (NYSE/GE), The Procter & Gamble Company (NYSE/PG) and Intel Corporation (NASDAQ/INTC) are just a sample of many Dow stocks that haven’t done a thing all year. There are plenty more of these large-caps that are actually down since January. It makes me wonder just how the broader market has done so well over the last six weeks.

Earnings seasons are always important and the best time to be scanning the landscape for new investment opportunities. This earnings season is particularly important because the third quarter really was a transition period when a lot of government stimulus programs were withdrawn from the economy. In the first two quarters this year, a lot of big companies reported flat to modest revenue growth with surprisingly strong earnings results. Many companies reported that they were actually able to raise their prices without affecting demand. This earnings season, it will be very interesting to see if this trend continues. My best guess is that only those companies with substantial operations in Asia will show any strength in earnings. The rest of the equity marketplace is still very much in a fragile state.