April 23, 2014

Meandering Markets

Some of the most difficult times in life are when you just have to watch and wait.  This is the dreaded space known as Limbo.  Limbo is defined by Wikipedia as, “… any status where a person or project is held up, and nothing can be done until another action happens.”  And that my friend is where Mr. Market finds himself again this week. As individuals we usually don’t do to well with Limbo.  We want to take some sort of action so that we can feel “in control”.  But sometimes the action of waiting is the best course of action.  Other times it is recognizing when market forces are re-aligning themselves because fundamentals are shifting.  Look at what is happening to the top performing stocks of 2013.

 2013's Top 10 Performing S&P 500 Stocks YTD:

  1. Netflix (NASDAQ: NFLX) +269%
  2. Best Buy (NYSE: BBY) +238%
  3. Micron (NYSE: MU) +236%
  4. Delta Air (NYSE: DAL) +129%
  5. Pitney Bowes (NYSE: PBI) +120%
  6. E*TRADE Financial (NASDAQ: ETFC) +116%
  7. Celgene (NASDAQ: CELG) +115%
  8. Boston Scientific (NYSE: BSX) +109%
  9. Genworth Financial (NYSE: GNW) +105%
  10. Facebook (NASDAQ: FB) +104%

Netflix for example is down 5.41% YTD as of 4/17/2014.  Best Buy is down 38% YTD as of 4/17/2014.  CELG is down 16.3% YTD as of 4/17/2014.  Now to be fair, not everyone on the top ten-list is down YTD.  Micron and Facebook for example find themselves higher on the year as of 4/17/2014.  So what does all of this mean?  It means that the Market is pricing in the changes that it sees coming.  As the Federal Reserve slows its bond purchases the easy money that was once a tailwind to stocks will now be only a gentle breeze.  The companies themselves will have to fundamentally earn the valuations that the markets are putting on them.

Fundamental valuations have not been the most important factor in whether a stock was able to do well within the centrally planned economy that we have found ourselves in inside the United States for quite some time.  One measure of fundamental valuations is to look at a stock’s current price divided by its earnings.  Netflix for example has a price to earnings ratio of 180%.  The 15 year average for the consumer discretionary sector (where Netflix lives) is 18.2%.  I think you can see by this example that the excitement for how this new service might be used by consumers and advertisers has priced this stock for perfection.  And if there is any hiccup in the economy, like rising food and oil prices let’s say, than this stock could be in for more trouble.  But other areas of the market are in the process of forming some leadership here.  So, it isn’t a question of is the market crashing, but where is the leadership going to come from?  New areas of the market that have been the laggards are seeming to come to life, and what you need is a  strategy that can identify the opportunities and help position you to enjoy the ride.

Currently the broad market is not signaling that risk is off, just look at the price of gold.  As of 4/17/2014 gold is trading below its 200 day moving average.  That is not the usual occurrence when fear takes hold of the market.  Just look at a time period like 2011 when everyone thought the Euro Zone was coming apart at the seams.  During that time gold traded into a peak price of $1923 on September 6, 2011, and its 200 day moving average was approximately $1500.00.  So, what is your strategy to identify what is going on with the broad markets, and then how do you position to take advantage of that?  With each move the Mr. Market makes you need to make sure you strategy is aligned.  If you need a partner to help you do that, I hope you will visit us at amjfinancial.com, and take advantage of a free strategy session.

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