What the Pros Are Doing Now
|Written by Rob Goldman|
Investment pros are just as confused as you are regarding the stock market’s direction. What is scary is that this week’s Q2 reporting and associated future guidance of just six companies could shape the direction for weeks to come.
Against this backdrop, what are the investment pros doing today? We outline it for you and give you tips on how to mirror their approaches in this week’s edition of The Goldman Guide.
Plus, we dissect the state of financial stocks, which are measuring sticks for the market, along with providing a birds-eye view and expectation for small caps and microcaps.
Bullish on the market but not sure what to buy? The Gang of Five Sin Stocks we profiled a month ago has soundly beaten the market. See which two we believe have the greatest near-term upside.
DON’T FALL ASLEEP ON THE MARKET
Nearly everyone hates uncertainty and investors are no different. Needless to say, even investment pros are skittish as evidenced by the big jump in volatility and sharp swings lower last week. We all want some semblance of guidance and we may well get it by week’s end.
A great piece on www.MarketWatch.com citing a FactSet report illustrates that this week, 6 companies representing nearly one-fifth of the S&P 500 Index’s tech and financials sectors will report 2Q14 results. That means that these 6 companies represent a whopping 6+% of the 500 company index. So, as these stocks report their results, stock market direction hangs in the balance.
Therefore, you don’t want to be asleep at the switch. These 6 catalytic companies are:
· Citigroup (NYSE— C) for Monday
· JPMorgan (NYSE—JPM) and Intel (NASDAQ—INTC) for Tuesday
· Bank of America (NYSE—BAC) for Wednesday
· Google (NASDAQ—GOOG) and IBM (NYSE—IBM) for Thursday
Investors have reason for concern. Financials are shaky. If investment banking revenue from the huge number of IPOs and M&A activity can offset the low equity trading volume, results may end up as adequate. I have my doubts but it could be a wash, despite the fact that ETFs were bought in billion dollar bunches in Q2. However, if low trading activity continues, without the benefit of high corporate finance business, a profitability driver will be removed, and guidance will reflect it, prompting the stock drops.
Financials, Tech, Big, Small, and Microcap
Wells Fargo (NYSE—WFC) wasn’t particularly great last week and Bank of America seems to be the most at risk of the three financials reporting this week.
New school meets new school when IBM and Intel report during the same week as Google. As with financials, guidance is key. Still, the market really needs good numbers and guidance from Google to give investors comfort. Without it, even with solid results from the two old school tech titans, we could see a real catalyst for across the board selling since slower growth does not go well with the current high valuations.
We wrote two weeks ago that big tech was in danger and last week, the NASDAQ Composite dropped by nearly 5% at its trough before rising at week’s end. While scared investors overreacted in really selling off microcaps, the better valuations and upside exists in the small space.
The table above, generated via the www.Russell.com site, shows how through Thursday, microcaps are lagging far behind the large cap market and even small caps on a month-to-date and a year-to-date basis. The oddity is that the Russell 2000 Index carries a 15% higher P/E than the microcap index, despite a lower projected growth rate. It seems that the lower trading and skittishness despite the lack of volatility has prompted this scenario. Don’t expect it to last too long.
What the Pros Are Doing
It is no secret that the pros are wringing their hands over earnings season, as noted earlier. Good numbers and good guidance can mean some semblance of buying. Still, despite the compass that the big caps may provide the pros, they are really looking a few steps ahead.
For starters, they are taking some money off the table and considering trading on current volatility, such as our out-of-the-box TVIX idea last week, which performed admirably, or health care stocks. Pros are also waiting with baited breath on the latest retail report. Retail stocks have been out of favor and they likely will remain so for a spell. As we noted last week, July and August tend to be rough on stocks and investors, which doesn’t help. However, once the first big earnings week concludes, it is actually time to start considering buying retail and tech stocks that will outperform the rest of the group due to the “Back to School season.”
Just like the pros, you should engage in as much due diligence and research as possible on the topic. A strong back to school season does not mean that all consumer sectors or companies will outperform. However, the prepared investor can discern what apparel, technology, or department stocks appear to have the greatest upside and will use some of that cash for these purchases.
And before then? Stick with the sin stocks we highlighted a month ago. This Gang of Five has soundly beaten the market in the past month. ISSC and BREW seem poised to be the best of the bunch for the rest of the summer. Click here to see the original post: http://www.goldmanresearch.com/20140616786/The-Goldman-Guide/buy-these-sin-stocks-now.html
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