Summertime Stocks |
Written by Rob Goldman |
Good morning! With earnings season ending this week, we reviewed the performance of the key indices in the summer and fall from 2008l, along with how to play the likely moves ahead based upon trends, sentiment and expected events. SUMMERTIME STOCKSWith the Russell 2000 Index in correction territory and earnings season for the first quarter coming to a close, we elected to review recent summer stock performances along with associated investment themes. Clearly we are early to this game but it will enable you to stay one step ahead of the crowd. Sentiment is Largely Neutral The intraday volatility of major indices such as the NASDAQ Composite and the Russell 2000 has left a lot of people shell-shocked at worst and gun-shy at best. There is little conviction in buying and anyone selling is doing so just to de-risk their portfolios. As a result, many investors that were somewhat neutral are now bearish and modestly bullish investors are now neutral. The most recent American Association of Individual Investors weekly investor sentiment survey illustrates this notion. Nearly 45% of all respondents refer to themselves as neutral. The average percentage is typically 30%. Technicians Are Frightened For all of the fancy parabolics and stochastics, the 200-day moving average indicator is still the one barometer that all technicians believe carries the most weight. With the Russell 2000 Index trading below its 200-day moving average for the first time in many quarters, small cap growth investors are spooked. Many small investors have become so programmed to follow the charts they are dropping out of stocks all together until the market turns positive again. That is a big mistake as they are missing out on real opportunities in small cap value where companies are making money. With Earnings Season Over, Now What?Earnings season for 1Q14 is coming to a close this coming week, and the chance to take advantage of some ‘good news pops’ maybe closing in what is becoming a sideways to bearish market. The question is what will the summer, and the rest of the year bring for investors and traders? It is becoming apparent that many believe that it may take a couple of months before sentiment about the second quarter provides enough interest in stocks to drive the market higher. Therefore, for those still actively engaged, a lot of homework regarding valuation and growth drivers will have to be performed in order to find the right stocks to buy. After all, there will not be any real news to help change the momentum. The figure below illustrates the annual, ‘summer’, and end of the year gains/losses for respective market indicators since the start of this bull run in 2009. As with any of these types of charts, past history does not indicate future results. ![]() Think About BuyingDon’t Go Bunker, Start Buying The reality is that with so many investors neutral to bearish there may not be more than a 10-15% downside in many individual stocks. Therefore, the real money may be made by dipping your toes back in the water. Even though housing stocks and others in related sectors have not performed well, an interesting market phenomenon could portend a positive turn in stocks. As of Friday morning, the top 5 big gainers were all industrial, economically-sensitive plays. Since these stocks often lead us out of corrective phases, it is a good idea to explore riding this wave to new levels as a precursor to a more favorable market environment. Plus, as valuations in the small cap space continue to decline, larger, cash-rich competitors may seek to acquire some of these stocks, creating a new base from which stocks in attractive segments could rise. Since we have not yet seen the real capitulation selling on big volume, sitting on the sidelines is not such a bad idea. However, when volumes jump in conjunction with market declines, the accumulation phase will begin. Have a great week! Launched in May 2010, The Goldman Guide is a free weekly publication of Goldman Small Cap Research and is written by Founder Rob Goldman with contributions from the GSCR contributor team. This non-sponsored investment newsletter seeks to provide investors with market, economic, political and equity-specific insights via an action-oriented, straight to the point approach. No companies mentioned in this newsletter are current sponsored research clients of the Company or its parent, With rare exceptions, all companies or investment ideas mentioned in this publication are publicly traded stocks listed either on the NYSE or the NASDAQ. 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