Yesterday in this space we addressed the question on most investor’s minds. Was the reversal in global equity markets late last week the start of the sort of V reversal that we have become so accustomed to after every market correction for the last 5 or so years? (MorningWord 2/16/16: What Lies Beneath?) Here was my answer to that question:
My intention is not to immediately dismiss a healthy bounce in global stocks from a very oversold condition. Investor sentiment got downright nasty of late and a bounce seems in order. My intention is to show how the volatility provides investors great opportunities to re-evaluate their current plan.
Aside from less pessimism in the last week, not much has changed, and the growing talk of more QE, or NIRP is not bullish for global equities. In the event the global economy does not see an expected lift in 2016, the time between here and new QE could be ugly. The technical set up for the SPX seems fraught with pitfalls if the best case scenarios do not soon emerge.
And it wasn’t just equities that reversed course here in the U.S., US Treasury yields staged a sold bounce, with the 10 yr yield going from 1.5328% (its lowest level since late 2012) Thursday morning to 1.815% as I write, Gold reversed from a 52 week high Thursday, now down nearly 5%, Crude oil retaking the physiologically important $30 level, and the VIX down 20 or so percent. We went from one of the most extreme risk off positions in U.S. risk assets in the last couple years to investors contemplating new highs in the S&P 500 in a matter of days.
My guess is we are not out of the woods yet. Market participants want to point to some of the strong bounces in single stocks in the last few days. And that is true. So I want to highlight a few economically sensitive companies that have kept pace on the bounce, and even out-performed in the last few trading days, but still show very poor relative performance year to date and from their 52 week highs:
Intel (INTC): while the stock’s 4% bounce off of Thursday’s lows ain’t bad vs the SPX’s 4.7% gains, the stock is still down 16.5% on the year, more than double the losses of the SPX. That said, the stock might have hit healthy support just below $28:
If I were looking for opportunities for single stocks to fill in recent gaps on a sustained rally in the broad market, INTC could fit the bill for a move back to its 200 day moving average just above $31, especially when you consider the bounce in shares of Cisco Systems (CSCO) since its earnings last week, rallying nearly 15% from its 52 week lows, largely the result of earnings guidance that was NOT worse than expected and increased buyback and dividend. But if the stock were not able to gain a head of steam, and shows continued relative under-performance, this would be a great candidate as a re-short, playing for new 52 week lows if the broad market rally were to peter out.
General Motors (GM): while the stock has outperformed the move in the SPX off of the recent lows up about 7% since Thursday’s lows, the stock is still down 16% on the year, and down 27% from its 52 week highs. Much like INTC’s technical set up, a move back to the 200 day could be in order on a sustained broad market rally, but a failure to get above $30 soon would make the stock a decent short candidate for a re-test of the August lows:
Citigroup (C): the stock is up nearly 13% from Thursday’s lows, but still down about 24% on the year, down 35% from its 52 week highs. I suspect that a failure at its earnings gap level just above $43 would be a great level to re-short, but I’d be surprised if it even gets back there any time soon:
Toll Brothers (TOL): reports their fiscal Q1 results February 23rd before the open. TOL is up 8% from its lows Thursday, but still down 23% on the year, and down 39% from its 52 week highs. It seems that investors in homebuilders don’t know what to make of the Fed’s uncertain message on the pace of interest rate hikes, but they shot first and asked questions later. I’m not even sure where a good short level would be, maybe $30, just below the stock’s 50 day moving average, but I’d also be surprised if it got there anytime soon. If the stock stalls after next week’s print, it is likely a re-short in the high $20s, playing for a retest of the 52 week lows near $24:
As I said above, all of these stocks have under-performed the broad market in 2016 and from their 52 week highs, all trade well below a market multiple, and all offer some fairly decent insight into the health of the U.S. economy, and all for the most part act like crap. If they don’t play some serious catch up soon, this group could signal lower lows in the broad market in my opinion.