MorningWord 8/29/13: The peak to trough correction in the SPX back in May/June was about 7.5% (from the intra-day levels), only to make new highs in a little more than a month from the June lows. Since last fall, every dip in the U.S. and European equity markets has been a fabulous buy, but since the Aug 2nd low, we are starting to see a fairly disturbing trend where the breadth of the rally is declining with a lack of support by some megacaps in the S&P500 which I spoke to yesterday in this space:
the top 20 names in the SPX, they make up whopping 30% of the weight of the entire index, yet on average those stocks are up only about 12%,which displays wider participation than in past market tops where the largest gains came from a small handful of heavy weighted stocks. So the main take-away is if the biggest stocks in the market are not participating (not displaying leadership), and we do go into a risk-off environment, we could see a fairly dramatic move out of mid and smaller cap names (the Russell 2000 is up 19% ytd vs the SPX up 14%).
An example of this large-cap under-performance is TGT, a stock that in July made a new all time high but failed to keep pace with the index of which it is a large component. Since the late July high, the stock is down 14%, almost in a straight line, and very quickly approaching unchanged levels on the year that would squarely put the stock in near “crash” mode down about 20% from the highs. The 2 year chart below of TGT shows the fall from grace, with no real meaningful technical support until $60.
Near term, TGT sets up for a very good bounce candidate somewhere soon, using that support level as a stop possibly, but the longer term chart (below – 10yr) shows a disturbing set up that shows what could be the mother of all double tops, which a REAL sell-off would put a $50 target on TGT’s back.
There are plenty of reasons to be near term bearish on equities given the multi-year run with the backdrop of a fairly anemic economic recovery at a time where the FOMC has outlined their intention to pullback from QE, and if things don’t go as smoothly as planned in the months to come, we are going to see a lot more market pundits start pointing to these “canary in the coal mine” formations from the summer.
As always, when evaluating the potential for a steep pullback vs a shallow one (which we are in now) we like to look for stocks that show relative strength and those that show relative weakness. In TGT’s case it is clearly the latter, but this one starts to get interesting very soon trading at only 13x next years earnings that are expected to grow 10%, with a 2.7% dividend yield, monster buyback and domestic focus, the stock could be a great play from the long side if and when the Taper causes a real tantrum.
ALSO as a Bonus, last night I saw Mumford and Sons at Forest Hills Stadium in Queens, he is a clip I took from what of my favorite songs, Below My Feet from their latest album Babel: