May 8, 2018

So far in May, the stock market likes those companies that have posted strong sales and earnings with strong positive guidance. Strong earnings aren’t enough. Strong forward guidance has to follow. I have fielded some concerned calls from investors wondering why positive first-quarter earnings are not being sufficiently rewarded. My answer is that any stock that announced positive first-quarter results but did not provide strong forward guidance was punished. However, many of these stocks typically rebounded in a few days. The bottom line is that good stocks bounce like tennis balls while bad stocks bounce like rocks.

In this world of decimalized trading, where the vast majority of market makers have been replaced by computer algorithms, I have learned to “wait to trade.” After all, Goldman Sacks has gone from 500 to three people in its market-making division as computerized trading has taken over. Computers don’t think, they react; so I sell stocks that have become a bit too volatile, but I wait to sell them into strength.

I’m in the process of pruning these volatile stocks. May, June, and July are not as seasonally weak as they used to be, according the Bespoke Investment Group’s latest “Seasonality” report, but the market tends to get more volatile in August and September. This essentially means that we have three months to prune our portfolios. As a result, I have earmarked selected stocks to sell into strength over the coming weeks.

In my “no excuses” portfolios, where I buy what I consider the best stocks in all sizes – micro, small, mid, and large-cap, plus the best international and dividend growth stocks – I own approximately 90 stocks. By the end of July, I hope to own just 80, 70, or even just 60 stocks, since I want to do some pruning and trim the excessive risk that has materialized in recent months. However, typically, I wait for upticks to do my pruning, since we remain in an erratic market environment where what is down can suddenly be up the next day or week, like the FAANG stocks have demonstrated in their wide swings in recent months.

The Lowest Unemployment Rate (3.9%) Since 2001

On Friday, the Labor Department announced that 164,000 payroll jobs were created in April, significantly below economists’ consensus forecast of 195,000. The February and March payrolls were revised up by a cumulative 30,000 to 324,000 (down from 326,000) and 135,000 (up from 103,000), respectively. The unemployment rate declined to 3.9% from 4.1% in March, due largely to a shrinking workforce. Average hourly earnings rose by 0.15% or 4 cents to $26.84 per hour, so wage inflation slowed to a 2.6% annual pace in the past 12 months. Labor force participation declined to 62.8% for the second straight decline.

On Wednesday, ADP reported that 204,000 private payroll jobs were created in April, which represents the fifth straight month of at least 200,000 new jobs per month in private payroll jobs created.

The other economic news last week was also largely positive. On Tuesday, the Institute of Supply Management (ISM) announced that its manufacturing index for April slipped to 57.3 in April, down from 59.3 in March, significantly below economists’ consensus estimate of 58.7. This is the lowest reading in the past nine months, but since any reading over 50 signals an expansion, manufacturing remains healthy. The ISM non-manufacturing (service) index also slipped to 56.8 in April, down from 58.8 in March.

The Energy Information Administration (EIA) announced on Wednesday that crude oil inventories rose 6.2 million barrels in the latest week. Also notable was that gasoline supplies rose by 1.2 million barrels in the latest week, so we might get some relief at the pump. Crude oil prices hit the lowest level in the past couple weeks due to concerns about the growing supply glut due to record U.S. crude oil production.

Israeli’s Prime Minister Benjamin Netanyahu’s press conference last week to expose Iran’s secret nuclear program, briefly caused crude oil prices to rise, but then quickly fizzled after API & EIA inventory data were released. Iran made the rare response of complaining that its nuclear documents had been seized by Israel’s Mossad spy agency, which ironically added credibility to Prime Minister Netanyahu’s assertion that “Iran lied.” Since the U.S. is expected to pull out of the Iran Nuclear Deal on or before May 12th, unless this six-nation deal can be amended to incorporate more stringent inspections, crude oil prices may spike one more time, but the long-term supply glut is expected to overpower demand and crude oil prices are expected to trade in a tight range between $65 to $70 per barrel during the peak summer driving season.

On Wednesday, the Federal Open Market Committee (FOMC) left key interest rates unchanged, but also signaled that a June key interest rate hike was likely. The FOMC also acknowledged that inflation was firming up. Furthermore, the FOMC said that both overall and core inflation “have moved close to 2%,” which virtually guarantees a June key interest rate hike. Overall, the FOMC statement signaled that the Fed intends to raise key interest rates slowly, but surely, as market rates rise. Looking forward, only an abrupt decline in Treasury yields could postpone more Fed rate increases later this year.

About The Author

Louis Navellier
CHIEF INVESTMENT OFFICER

Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. *All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

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