Two unexpected things caught my attention in the last 24 hours that were separate but related. There's so much background noise in watching the market and doing what I do, that when something hits me all of a sudden, it normally means that I should pay attention.
The first thing hit me yesterday morning. Typically, when I am at my desk, I am doing research, speaking to a client or watching the market. As I work, a bazillion news items scroll down the screen of my computer. While I try to keep an eye out for anything that might be important, I rarely find much that would cause me to go back and reread the item because it was so different. But yesterday there was one such item. Microsoft (MSFT:Nasdaq) announced a price cut on its Office XP product. I use the product, but what struck me as strange was that a monopoly company was cutting prices. Hmmm, that must mean demand isn't so great. I have never seen Microsoft cut prices on anything (later confirmed by my friend Scott Reamer, a former MSFT sell-side analyst).
Later in the day, someone mentioned the Microsoft news item to me, and then when I told Brian Reynolds about it, he said he noted it too. In other words it was a different enough news item to make people do a double take. Remember, I don't have a TV in my office, and no bells and whistles go off when an important item crosses the scrolling news. I asked Brian if anything else stood out for him on the scrolling news yesterday, and the Microsoft item was the only one he could recall.
The second thing happened this morning. On my drive in from Northern New Jersey, I listen to the financial news on Bloomberg Radio. Typically, I don't pay much attention to what folks are saying because I am not a big fan of "sound bite analysis." I usually listen to what the futures are doing and, if there is a meaningful change, I listen to hear why. This morning was different.
As I was chatting with my car pool buddy Linda, I heard a woman being interviewed on the radio saying that right now, too many people are making investment decisions for non-fundamental reasons, which ultimately could be problematic. She backed that up by saying people are buying higher-yielding stocks because of recent tax legislation without doing work on the fundamentals behind what they are buying. The woman said the same holds true for people buying stocks because the lower dollar benefits via currency translation multinational companies. Frankly, I wasn't surprised to hear the anchor identify the woman being interviewed as Liz Anne Sonders, a strategist who I respect very much. I looked at Linda and said, "I guess people are back to buying symbols instead of companies."
Here's how the items tie together for me: Yesterday's Microsoft news reinforces other recent data suggesting a lack of fundamental improvement in the economy. The comments by Sonders this morning reinforced the notion that people are chasing trades rather than investments. Both items suggest the rally is more structurally based and not a precursor to economic improvement at this juncture.
The market and many of its components recently broke out of the trading range that many of us have been talking about, which also cannot be ignored. Frankly, it argues that the short side isn't justified because you'd be guessing on a reversal. Sure, I could find reasons and indicators suggesting the market should go down from here, but again... that would be data-mining. I also would be lying if I said I thought the breakout is sustainable, instead of being structurally driven. So instead of focusing on whether the breakout was real or sustainable or blah, blah, blah, I'm going to continue focusing on potential rotation looking for sector, industry and stock shifts.
I can't make an extremely bullish case for the market because of lackluster economic activity, above-average valuations and because at this stage of the recovery, bond yields should be going in the other direction, given the economic and fiscal stimulus. Neither can I make an extremely bearish case, because as Brian Reynolds has been pointing out, this is the first time in four years that corporations have tapped the capital markets to raise funds out of improved investor demand rather than necessity. In other words, companies have raised money they can use to grow instead of raising money to stay in business.
As the market makes new highs, why are market leaders like IBM (IBM:NYSE) and General Electric (GE:NYSE) oversold? In other words, there is rotation underneath the indices. I continue to believe that money coming in is likely to move to the household names in the Consumer Staples sector, where the technical, fundamental, psychological and structural framework appears solid.
• Technically, the sector broke its downtrend and is emerging from a near-term base, as the chart below shows.
• Fundamentally, the valuations in the sector as a whole do not appear to be stretched, especially relative to the market. In addition, by definition, these companies are influenced less by economic swings. So if the economy does weaken, they should not be hurt as much as other sectors.
• Psychologically, if the market does continue to work higher and individual investors go back to buying stocks, they are likely to buy something they consider safe instead of winging it and getting creamed again. People can justify buying Pepsi (PEP:NYSE) (or a fund that holds similar stocks) rather than the latest and greatest company they have never heard of before.
• Structurally, most of the Consumer Staples growth story is overseas, meaning those companies have the multinational benefit of the decline in the dollar.
The Consumer Staples chart has improved
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