Why Investors Are Now Running to These Traditionally Safe Stocks

Why Investors Are Now Running to These Traditionally Safe StocksHistorically, when the economy is recovering from a recession and heading into a cyclical growth phase, the market sectors that traditionally do well are the technology and semiconductor industries.

Investors buy the stocks in these areas because earnings growth for these companies usually rises rapidly as the economy enters a growth phase. Yes, many argue that the U.S. economy is in a recovery phase. But the semiconductor and technology market sectors have been underperforming the general stock market. This underperformance is a key indicator.

Follow what the market does, not what people say.

Usually, when the economy is about to enter a recession, the defensive market sectors outperform other stock market sectors. Those defensive market sectors are utilities, consumer staples, and health-care stocks.


I highlighted recently how the defensive market sectors were outperforming the rest of the stock market. This key indicator is a strong sign that the U.S. economy and the stock market are in trouble and have more downside to them.

Last week, something happened with the defensive market sectors. You can see it in the following charts:


Chart courtesy of www.StockCharts.com


Chart courtesy of www.StockCharts.com


Chart courtesy of www.StockCharts.com


Not only are these market sectors outperforming, but they have also started hitting new highs!

I believe these key indicators are continuing to signal that the U.S. economy is headed into a recession (see: The 2013 U.S. Recession). The new highs suggest that more and more investors are worried about the recession in Europe and the slowdown in China hitting the U.S. economy hard, hence money is moving into utility, consumer staples, and health-care stocks.

Investors are jumping into the defensive market sectors, because they don’t believe the economic growth story. More than economists talking, these key indicators illustrate what investors are doing with their money and, more importantly, show that not only is the U.S. economy slowing down, but also that the possibility of a recession is real and growing.

Historically, markets usually trade six months ahead of what the actual economy does. Therefore, these key indicators are saying that a recession could hit the U.S. economy as soon as the fall.

There are key indicators within the stock market that are raising red flags.

Michael’s Personal Notes:

Some other key indicators are pointing to a possible recession in the U.S. economy.

The Institute for Supply Management (ISM) Index creates useful readings of the U.S. economy usually relied upon as key indicators. Besides the main manufacturing index, it also creates a non-manufacturing index to gauge how the services sector within the U.S. economy is faring.

In June 2012, the non-manufacturing index fell to its lowest level since January 2010. This key indicator is yet further evidence of a slowing U.S. economy.

In addition to this troubling development, the National Federation of Small Business (NFIB) just released its monthly survey of small businesses in this country, another key indicator of economic growth.

The NFIB’s survey fell to the lowest level since October 2011 and has been at levels more closely related to recessions than economic growth: another key indicator. This survey noted frustration based on the fact that it had gained some confidence in 2012, but that in the last few months, those gains have been completely given back.

Within the index, the chances of increasing capital spending, hiring workers, and witnessing an improving economy were greatly reduced in the month of June. This key indicator is further evidence of a slowing U.S. economy that could tip into recession.

Corporate earnings for the second quarter have just begun to be reported and already the warnings are coming in. Just two months after assuring investors that things were fine, S&P 500 semiconductor maker Applied Materials, Inc. (NASDAQ/AMAT) said that $500 million worth of chip orders was cut in June and that additional severe cuts could be on their way. (Source: Reuters, July 10, 2012.)

Applied Materials noted it would not meet its full-year 2012 revenue and profitability targets. The company supplies the chips that are found in Intel Corporation (NASDAQ/INTC) computers and Samsung phones, among other products from leading technology companies. Considering its clients, Applied Materials should be considered a key indicator.

One of Applied Materials’ main competitors is Tokyo Electron, which reported a 28% decline in orders. This means the weakness is an industry problem, not a company-specific problem: again, this is a key indicator.

Clearly this is a consequence of the recession in Europe, the slowdown in China, and the slowdown in the U.S. economy, which are affecting corporations as they report their earnings for the second quarter.

Another S&P 500 company, Cummings Inc. (NYSE/CMI), is a global designer, manufacturer and distributor of many types of engines in 190 countries around the world. Cummings said that, due to the weakness in the U.S. economy, Brazil, China, and India, it is cutting its revenue forecast to zero growth for 2012.

Earnings have just begun to flow in from S&P 500 companies, so be prepared for more earnings disappointments as weak economies put pressure on all corporations, especially the global companies found in the S&P 500.

All the above key indicators are signaling economic warnings, dear reader. We need to heed them. (Also see: Another Key Stock Market Indicator Flashes Red.)

Where the Market Stands; Where it’s Headed:

Unless I’m reading my charts wrong, the Dow Jones Industrial Average has closed down five of the last five trading days. As the world’s most watched stock market index gets closer to the point where it started the year, we are seeing a spike in bullishness from advisors (which is actually bearish for stocks)!

We are right at the end of a bear market rally in stocks that started in March of 2009. All that is left for a final upside stock market reaction is the Fed announcing another round of quantitative easing.

What He Said:

“We will wish Greenspan had never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in Profit Confidential, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy in which the Fed first dropped interest rates to one percent in 2004.