05/02/12   Wall Street 70% Wrong On Earnings

Editor’s Corner

Investor Heat Map: 5/2/12Wall Street 70% Wrong On Earnings

If your intent is to “sell in May and go away,” the time to do so is here.  Staying in cash for the summer has been a good move more often than not.  Will it be so in 2012?  Possibly, but investors should also consider this is an election year, in which stocks tend to have an upside bias even during the summer months. 

Earnings season is winding down and seems to have gone well.  Some 350 of the S&P 500 companies have now reported, with 70% of them beating Wall Street’s profit expectations.  Whether this is more related to outstanding corporate performance or sub-par analysis remains to be seen. 

Equity benchmarks pulled back in early trading today after an ADP report showed the smallest job gains in seven months.  The Labor Department will release April employment data this Friday.  Barring a major surprise, it should continue to show improvement but far below the pace needed to restore the economy to health.

Last Friday’s quarterly GDP report also called recovery into question.  While the numbers will be revised and two quarters do not necessarily make a trend, a decline from 3.0% to 2.2% is not indicative of the “recovery” seen by many analysts.

A drop in ten-year Treasury yields to 1.9% – the lowest levels since February – also calls the recovery hypothesis into question.  If the underlying economy were truly growing, we would expect to see more signs of inflation pressure.  With the exception of food and energy prices, inflation seems like the least of our problems right now.  Gold prices say the same thing; bullion is roughly at the same level as nine months ago.  Stock prices do not always follow the economy, but we wonder how long the benchmarks can keep rising above such stagnant waters.

Sectors

Again we have a new leader, and this week it is Consumer Discretionary.  The group is hitting on all cylinders as retailing, homebuilders, and leisure all zoom higher.  Financials fell to second place as volatility returned to the sector.  Health Care and Technology are close together in third and fourth place.  Incidentally, today’s top four sectors are the “Big 3” plus Consumer Discretionary we discussed a few weeks ago.  At the opposite end of the list are Materials, Telecommunications, and Energy, all of which crossed above zero to post positive momentum today.  Energy’s jump was particularly impressive, with the sector now above its 200-day moving average.  Nevertheless, someone has to occupy last place, and Energy is still it.

Styles

The late-April rally allowed all the Style categories to improve since our last report.  Large Cap Growth still holds the lead with Mega Cap close behind.  Mid Cap Growth moved ahead of Large Cap Blend, suggesting a stronger investor preference for Growth stocks.  The middle of the pack was little changed, and the Small Cap categories still hold the last three spots.  We did notice two important changes, though.  First, Small Cap Growth moved ahead of the other two, further reinforcing the Growth preference noted above.  Second, all three Small Cap designations improved from slightly negative momentum readings a week ago to solidly positive scores today.  This indicates healthier market conditions.

Global

The “United” categories are back in the global lead today.  The United States hangs on to its top billing, and the United Kingdom is right behind.  The U.K.’s ascent was facilitated by a strong British Pound.  Many observers expect this to continue as long as the Euro debt crisis remains unresolved.  Pacific ex-Japan fell to third to make room for the U.K.  Canada – a global laggard for most of 2012 – finally broke into the top half of the chart.  Momentum is not especially impressive on an absolute basis, but it is still good enough to make Canada above-average.  EAFE, China, and Emerging Markets managed to move from slightly negative to slightly positive scores.  Japan, the E.U., and Latin America cannot say the same, with all three huddling together at the bottom.

 

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
 

“Significant ETF buying will have to resume in order to breathe some life back into gold.”

UBS analyst Edel Tully, May 2, 2012


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