Market Begins May

Market Begins May with a Healthy Rise

by Louis Navellier

May 3, 2016

*All content in the Marketmail Introduction is the opinion of Louis Navellier of Navellier & Associates, Inc.*

Through April 30, the DJIA is up 2%, the S&P is up barely 1%, and NASDAQ is down 4.6%.  As Apple proved last week, and Netflix demonstrated in the previous week, the leadership of the stock market is changing fast.  The stock market may look calm on the surface, but we’re constantly seeing various sectors and stock market components churning wildly under the surface.

Last week was an incredible week for earnings surprises.  The flagship stock that was talked about the most last week was Apple, which posted negative first-quarter sales and earnings growth – its first drop in revenues in 13 years.

Apple and Apple Core Image

Compounding Apple’s woes, the analyst community is forecasting negative sales and earnings growth for the next two quarters and for all of 2016.  Apparently, there is a push back in emerging markets about the cost of Apple’s premium iPhones, which are very expensive relative to other smart phones.  Even though Apple introduced a cheaper iPhone SE to boost its emerging market sales, competition for smart phones is real and operating margins are under compression.  Despite the fact that Apple boosted it stock buy-back program and raised its quarterly dividend, investors were rattled by the first sales decline in iPhones after an incredible nine-year run.  Clearly, Wall Street wants to see positive sales growth, which Apple will likely deliver by the fourth quarter, when its long-anticipated iPhone 7 is expected to be released. (Please note: Louis Navellier does not currently hold a position in AAPL or NFLX. Navellier & Associates, Inc. does not currently hold a position in NFLX for any client portfolios. Navellier & Associates, Inc. does currently hold a position in AAPL for some client portfolios.)

In This Issue

In the midst of earnings season, the news stream is so heavy it’s hard to see the bigger picture, but Bryan Perry looks at stocks vs. junk bonds for some significant trend indicators, while Gary Alexander looks to rising growth in Europe and Asia to offset the slowdown in America.  Ivan Martchev continues his series on the amazingly powerful yen, plus the trade-off between gold and gold stocks as gold nears $1300.  In his Sector Spotlight, Jason Bodner looks at violent sector rotations as something like colliding galaxies. Then, I’ll update you on what’s working best on Wall Street and what’s liable to work best in the future.

Income Mail:
Earnings Results Reflect a Weak Economy
by Bryan Perry
A Bigger Bark for the Junkyard Dog

Growth Mail:
First-Quarter GDP Growth Falls to 0.5%
by Gary Alexander
“Sell in May” Continues to Seduce Market Timers

Global Mail:
The Yen’s Riddled Road to 100
by Ivan Martchev
Gold and Gold Stocks Don’t Really Mix

Sector Spotlight:
A Collision of Galaxies is Coming!
by Jason Bodner
Dancing to Different Drummers

A Look Ahead:
Some Gems (and a Lot of Junk) Lead the Recovery
by Louis Navellier
Corporate Stock Buy-backs Boost EPS

Income Mail:

*All content in "Income Mail" is the opinion of Navellier & Associates and Bryan Perry*

Earnings Results Reflect a Weak Economy

by Bryan Perry

Going into the current earnings season, major market averages built up some nice gains, based in part on the expectation that most companies would at least meet their low first-quarter profit forecasts. Without much fanfare, that’s exactly what happened, with the notable exception of a few high-profile beats and misses along the way. The market’s resilience is also partly due to the rally in the oil market with WTI crude currently trading at $46/barrel with the next OPEC meeting scheduled for early June. The move in crude oil has contributed to a large compression in high-yield spreads, while other spreads were not as active.

This past week saws the S&P 500 fail to take out overhead resistance at 2,100 while relative weakness in several large-cap tech names kept the NASDAQ Composite in the red. Some big-name tech giants disappointed the crowd while others received broad endorsement for their Q1 results with sizeable share price gains. Let’s just say earnings season is anything but smooth sailing. It’s choppy, and – for some companies – downright sloppy.

On the economic front, investors did receive some market-moving data last week: Thursday’s advance reading of first-quarter GDP at +0.5% was below the +0.9% consensus. This slowdown was based on a larger decrease in nonresidential fixed investment, a deceleration in personal consumption expenditures (PCE), a downturn in federal government spending, an upturn in imports, and larger decreases in private inventory investment and in exports – partly offset by an upturn in state and local government spending and an acceleration in residential fixed investment (data source: U.S. Bureau of Economic Analysis).

This is a yellow flag in regards to business capital spending and was not what the market was banking on. Before the GDP news came out, last Wednesday featured the release of the latest policy directive from the Federal Open Market Committee (FOMC), which acknowledged that growth in economic activity appears to have slowed since its last meeting in March, and that it expects inflation to remain low in the near term.

Real Gross Domestic Product and Deflator Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

We can extrapolate from those admissions that the FOMC will want more time to study incoming data to ensure that there is sustainable progress toward meeting its long-run objectives. In other words, the probability that the FOMC will raise the target range for the fed funds rate in June remains very low.

Overall, the FOMC’s April directive contained a lot of similar language to the March directive, as well as the same unwillingness to state a risk bias. As a result, the fed funds futures market expects that the next rate hike will likely be announced in November (a 51.7% chance) vs. last week’s 50.0%+ likelihood of the next hike taking place in December (source: CME Group).

A Bigger Bark for the Junkyard Dog

Investors are watching the three leading central banks for clues to the market’s next direction. The non-action by Japan’s central bank – refusing to add further stimulus – sparked a 3.7% slide in the Nikkei. Janet Yellen and the Fed failed to clarify their dot-plot roadmap, so the S&P 500 corrected 1.3% last week, while Europeans are focused on a potential exit by the U.K. from the European Union; but there hasn’t been much talk about the sudden and bullish upside technical breakout of the junk bond market.

Just this past week, the two most widely traded and followed high-yield ETFs each broke through their respective 200-day simple moving averages. For all the technical gurus that say, “Charts don’t lie,” it’s as if a floodlight was turned on in the high-yield debt market this past week and all the dogs of the debt market woke up. Shares of iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays High Yield Bond ETF (JNK) are registering new five-month highs against a very skeptical investing landscape. I’ve been posting one or both of these charts since early January because they truly provide a real-time picture of the health of what is arguably the most controversial of all credit markets. (Please note: Bryan Perry does not currently hold a position in HYG or JNK. Navellier & Associates, Inc. does not currently hold a position in HYG or JNK for any client portfolios.)

When I see a divergence between bullish price action and negative sentiment, I’ll take the price action any day. Professionally-managed money is considerably less emotional about headline risk than the retail world. Prices of junk bonds would not be appreciating if their ability to perform on interest coverage was deteriorating. And this rally in the junk bond sector is occurring just as Puerto Rico is at risk of registering its largest default to date, as $470 million in debt obligations are due to bondholders this week.

iShares iBoxx High Yield Corporate Bond Exchange Traded Fund Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Much uncertainty surrounds whether this financially strapped island can find the funds necessary to stave off total default. Puerto Rico Governor Alejandro Garcia Padilla said last week that despite seeking a solution with its creditors, an agreement that completely prevents default is likely not achievable.

Unfortunately, the Government Development Bank (GDB) is besieged with its own liquidity crisis, with the most recent financial documents showing that the bank only had about $562 million in its coffers. The GDB's financial situation is in such dire straits that Garcia Padilla issued an executive order in early April declaring a state of emergency at the bank and initiating capital controls, which froze nearly all withdrawals and suspended the GDB's lending power. (See CNBC.com, April 29, 2016, “Puerto Rico at risk of largest default yet”)

So, with a near-certain, debt-ridden train wreck about to take place in Puerto Rico, the rally in energy prices, the promise of the ECB to back bad loans on the books with certain member banks within the EU, and the latest rally within certain sub-sectors of the commodity markets (ex: iron ore), there is a fresh pulsing light at the end of the tunnel. This should have investors feeling better about the prospects of the stock market further consolidating its March-April gains and then setting up for a better second half of the year for further upside appreciation led by what has worked best all year – blue-chip dividend stocks.

After all the hand-wringing about high-yield corporate debt defaults in the energy sector, prices for junk bonds are spiking and are now flat as a group for 2016. So if investors are bidding up the riskiest assets in the bond market, how do stocks and other securities react? HYG is up around 7% from the February 11 low. Using Kensho, a quantitative tool used by hedge funds, CNBC Pro found that when HYG rallies by at least 7% in one month, it usually keeps gaining (source: CNBC, March 2, 2016).

Barclays High Yield Bond Exchange Traded Fund Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Bond spreads between lower-rated issues and AAA-rated debt are narrowing, as can be seen from the table below. Just in the past week the spread between 10-year high-yield debt and that of the 10-year Treasury Note has narrowed by 34 basis points, a sizeable move that is influenced by the rebound in the price of crude oil and the relief of China reporting first-quarter GDP growth at 6.7%. Of the $1.35 trillion face value of debt in the B-of-A Merrill Lynch U.S. High Yield Index the two biggest sectors – energy and basic industries – account for 28% of total issuance.

Fed Fund Futures Rate Prediction Table

So what’s the takeaway for income investors after a week of erratic earnings reports, rising market volatility, and an anything-but-transparent Federal Reserve policy? It stands to reason that the market will continue to be range bound for the weeks ahead, where buy and hold strategies that do not pay any sort of yield will frustrate investors. That said, what is most encouraging is the progress in a sector where just four months ago the two scariest words in the financial markets were “commodities” and “debt.”

One of the oldest sayings among Wall Street pros is that “junk bonds tell us where the stock market is headed.” So, should you “sell stocks in May and go away”? I don’t think so.

Growth Mail:

*All content in "Growth Mail" is the opinion of Navellier & Associates and Gary Alexander*

First-Quarter GDP Growth Falls to 0.5%

by Gary Alexander

Gross Domestic Product (GDP) is a flawed statistic (see The Economist, April 30, 2016, “The Trouble with GDP”) and it is subject to large revisions in future months; but it has been the most-watched gauge of economic growth since the 1930s, so let’s take a look at the economic health of this old planet of ours.

Last Thursday, the Commerce Department announced that its preliminary estimate for first-quarter GDP growth was a miniscule 0.5%.  The last four quarters look like a descending “half-life” series, from 4 to 2 to 1, to 0.5%.  Specifically, we registered 3.9% growth in 2015’s second quarter, then 2% in the third quarter, 1.4% in the fourth quarter, and now 0.5%.  However, as I showed here two weeks ago, the second quarter often delivers superior growth.  We have to wait and see – something most traders don’t like to do.

Last week, I showed how business spending is the best barometer to watch.  Oops!  Business spending plunged -5.9% in the first quarter, the largest drop in several years.  The best news is that higher spending on services, especially healthcare, delivered what little U.S. GDP growth there was in the first quarter.

Looking overseas, the euro-zone is now growing faster than the U.S.  On Friday, Eurostat announced that first-quarter GDP grew at a 2.2% annual pace (Wall St. Journal, April 29, “Eurozone Economic Recovery Gathers Pace.”)  However, deflation still reigns supreme in Europe, as prices declined -0.2% in April.

China’s first-quarter growth came in at 6.7% (see Financial Times, April 15: “China GDP growth slips to 6.7% as stimulus eases slowdown,”) their slowest quarterly growth rate since the first quarter of 2009. India and China are still growing the fastest, and the top five growth economies are all in China’s orbit:

Economies Set to Grow 5% or More in 2016
 Source: The Economist Intelligence Unit 2016 estimate/forecast, April 30, 2016 
  Nation    Latest Quarter   2016 Forecast 
 India  +7.3% (Q4’15) +7.5%
 China  +6.7% (Q1’16) +6.5%
 Philippines  +6.3% (Q4’15) +6.3%
 Malaysia  +4.5% (Q4’15) +5.5%
 Indonesia  +5.0% (Q4’15) +5.1%

 

It’s odd that most of the headlines about China’s growth say it “slowed” to 6.7%.  If you are jogging along a country road at 5 miles per hour (the U.S.) and were passed by a car going 22 miles per hour (Europe), you would have time to wave.  But I don’t think you would say the Chinese car going 67 miles per hour is “slowing” from 68 mph the last time you saw it.  As this chart shows, Asia is still growing the fastest:

World Gross Domestic Product Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

India is growing even faster than China.  Considering their different demographic segments (as profiled below), India may continue to outgrow China in the longer-term, as their youngsters enter working age.

China’s one-child policy was not instituted until the 1980s.  Mao encouraged a population explosion in the 1950s – as cannon fodder if nothing else.  Mao said, “We are prepared to sacrifice 300 million Chinese for the victory of world revolution!”  (Source: “Mao: The Unknown Story,” by Jung Chang, 2005, page 458.)

Therefore, China’s demographic profile is heavily concentrated in working age (20-65) segments, while India’s demographics resemble the typical emerging-market pyramid, dominated by those under 30.

Age and Sex Structure of China and India Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Is China really growing at 6.7% or is that a polite fiction?  For verification, we might look at some other indicators. Economist Ed Yardeni wrote in his Wednesday briefing (“Professor Copper: Speculator?”) that China’s Industrial production rose 6.9% in March (year-over-year,) the best pace since January, 2015.  China’s official M-PMI rose to 50.2 last month, the first reading above 50 since last June.

In addition, the Financial Times wrote last Monday (“China’s commodities rebound: it’s for real” April 25) that China’s transition from an economy based on exports, construction, and manufacturing industries to a consumer-driven domestic economy is not working as well as they had hoped; so Beijing is pushing a revival of manufacturing and exports, a return to their winning game plan over the last few decades: “The most important takeaway from this is that investors should abandon the idea that China’s shift from industry and investment will be linear. In reality, it will be far more of a stop-start process” (FT, 4/25).

I don’t advise investing in China stocks, but I do believe global growth will continue, slower but in a positive direction.  I don’t invest IN China, but I invest because of the growth in China (and all of Asia).

“Sell in May” Continues to Seduce Market Timers

The S&P 500 tumbled 30 points (-1.4%) in the last two trading days of April, pushing its six-month performance (since October 31) below zero (-0.7%) for the first time since the 2008-09 bear market.   Perhaps some of the “Sell in May and go away” crowd was trying to steal a march by selling stocks early.

As any market timer will tell you, November 1 to April 30 is the stronger half of the year, giving birth to the “sell in May and go away” strategy.  According to Jeff Hirsch’s “Almanac Trader” (April 26, 2016, “Worst Six Months Begin in May,”) a hypothetical $10,000 invested in the DJIA in 1950 compounded to $838,486 during the six month periods from November 1 to April 30, while the DJIA actually declined a bit during the May to October months over the last 65 years, netting a $221 (-2.2%) cumulative loss.

That trend has continued recently with stronger gains in cold months vs. slower growth in warm months:

6-Month Performance* Ending
 *Using the S&P 500; Data Source: Yahoo Finance 
  Year    April 30   October 31 
 2011  +15.24% -8.09%
 2012  +11.54% +1.02%
 2013  +13.13% +9.95%
 2014  +7.25% +7.12%
 2015  +3.34% -0.29%
 Average  +10.10% +1.94%

 

The S&P 500 declined over the last 12 months – down 0.29% in May-to-October and down 0.68% November-to-April.  Beyond that, I see practical problems with acting on this “sell in May” theory: (1) For average investors, tax considerations (short-term capital gains) would deeply cut into your returns.  (2) Lately, we’ve averaged small gains in the summer months.  A gain is a gain, even if it is smaller.  Why give up the 10% gain in the May-October season of 2013 or the 7% gain in 2014?  (3) For most investors, a preferable strategy to selling all stocks is to be more selective.  There’s always a bull market somewhere.  And finally, (4) the “sell in May” theory ignores some historically good months in the heart of summer.   According to Bespoke Investment Group (in their “2015 Market Calendar,”) July is the best-performing month in the last century (+1.51% average gains), while August is the #5 best month, at +0.91%.

This makes “sell in mid-August and go on vacation” more sensible than “sell in May and go away.”

Markets always carry risk, especially late in a bull market and in historically weak months like May or September, but that only means that wise investors will keep an eye out for relative value – carefully selecting stocks in volatile markets – a discipline Louis Navellier and his team have been practicing for decades.

Global Mail:

*All content in "Global Mail" is the opinion of Navellier & Associates and Ivan Martchev*

The Yen’s Riddled Road to 100

by Ivan Martchev

My favorite finance professor in graduate school used to tell me: “Finance is not a science; it is an art.”  His point was that the interpretation of the numbers is the qualitative part that transforms understanding mathematics into understanding finance. The same numbers in one macro-environment can be interpreted one way, while they support the precisely opposite market reaction given another economic backdrop.

I do not believe that well-informed buy or sell decisions can be automated. I am aware of the parabolic rise in computerized trading (see Michael Lewis’ bestseller “Flash Boys,”) but in many respects that is beginning to look like a high-frequency bait-and-switch game. The most fascinating (and somewhat counterintuitive) moves in financial markets of late come from the currency and bond markets. In 2016, many expected bond prices to be lower and long-term interest rates higher, but the opposite has happened. (See my December 27, 2015 Marketwatch column, “Will 2016 Bring New Treasury-yield lows?”)

In the currency markets, it is not the euro that is making headlines these days, or even the British pound, which I would have expected to be weaker, but the Japanese yen, which I had expected to be stronger. The yen’s move last Friday to 106.3 (per U.S. dollar) is a fresh 52-week high, flying directly in the face of Japanese monetary authorities, who were experimenting with negative short-term interest rates – on top of a quantitative easing program that is 3X more aggressive than the Fed’s relative to the size of the Japanese economy – to weaken the yen (According to Bloomberg.com, February 17, 2015, “Bank of Japan Keeps Record Stimulus as Country Crawls Out of Recession”). The negative yield on 10-year Japanese government bonds (JGBs) closed at -0.08% last Friday, after declining to as low as -0.13% earlier in April.

United States Dollar Japanese Yen Exchange Rate - Daily OHLC Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I think the yen will move below 100 to the dollar this year, a substantial appreciation (the USDJPY cross rate is inverted, so fewer yen per dollar means a stronger yen). I think a further strengthening to below 100 may come, in part due to what I believe will be the coming Chinese devaluation. A Saudi riyal devaluation is also likely for related reasons, as the deflating of the Chinese credit bubble is likely to bring the oil price down to $20/bbl. after the present seasonal rally plays its course. (See my March 9, 2016 Marketwatch column, “What is behind the Yen’s Monster Rally?”)

Saudi Arabia Riyal Chinese Yuan Exchange Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I think a Chinese devaluation is coming as the Chinese government would likely feel that it has no other choice as their ongoing credit bubble prevents the current monetary easing by the People’s Bank of China from having the desired effect on the Chinese economy. (See last week’s Global Mail, “The Chinese Hard Landing is Progressing on Schedule.”)

Japan Ten Year Government Bond Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Since I believe that the coming Chinese devaluation and economic hard landing will have highly deflationary effects for the global economy, I would not be surprised to see the seemingly-absurd combination of 10-year JGBs moving further into negative territory and an even more expensive yen below 100 on the USDJPY cross rate. Negative short-term interest rates in Japan were supposed to bring about yen weakening, but we are seeing a completely opposite effect.

Nikkei 225 Index - Daily Nearest Line Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Based on where the yen closed on Friday and the apparent dynamics of unwinding carry trades – which for the time being are overpowering the BOJ – I expect further downside in the Japanese stock market. There is a very strong correlation between a stronger yen and weaker Japanese stock prices, as the famous Japanese exporters in the large cap Nikkei 225 benchmark index derive the majority of their profits from outside of Japan. A sharply stronger yen simply means less sales and earnings reported in yen terms.

Japan Interest Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This carry trade business that is driving the yen at present was made possible by the first zero-interest rate policy implemented in February 1999 when Japanese short-term interest rates first went to 0%. In normal times it is very profitable for a financial institution to borrow in the Japanese wholesale funding markets at very cheap interest rates and buy higher-yielding assets in other currencies, pocketing the interest rate differential. Japanese banks don't even need to go abroad to make money that way as long as there is a positive interest rate differential between JGBs and short-term interest rates, which is no longer the case for 10-year Japanese government bonds. Today only 30-year JGBs have a positive yield (at 0.42%).

Such short-term borrowing of yen at exceptionally low interest rates gives any global financial institution the ability to buy other assets that have very little yield as the carrying costs of betting on higher prices are so low. Regrettably, when there is stress in the global economy – as we have now – such purchases of stocks and bonds with borrowed money unwind and there is a scramble to repay borrowed yen. In my opinion, this is why the yen’s surge last Thursday and Friday was so pronounced, as most global stock markets and riskier bonds were under pressure.

Carry trades can only be done by financial institutions with access to wholesale yen funding markets and cannot be done by retail investors. It is not really a riskless endeavor as the yen exchange rate has made monstrous moves in the opposite direction of where the “fundamentals” would suggest. Such moves can result in sharp losses for carry traders that cannot see seemingly-counterintuitive moves ahead of time.

Finance is not a science after all.

Gold and Gold Stocks Don’t Really Mix

I am starting to get questions about gold’s role for individual investor portfolios as the sharp move in gold bullion this year has lit a fire under many gold stocks, many of which had experienced previous 80%-90% declines as the gold price corrected from $1924 in 2011 to the recent low of $1045 in December, 2015.

Here is the important point. The PHLX Gold and Silver Index (XAU, in green, below) reached a low of 40 in December 2015, matching its low in 2001 when gold reached a low of $255. The problem with XAU at 40 last December is that the gold price then was above $1000. The costs in the sector are out of control.

AUX Gold Index - Monthly OHLC Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Hence, you need to differentiate between gold stocks and gold bullion. The gold market dropped in 2015 in anticipation of the Fed’s December rate hike “fake out.” That might be a real bottom, but I expect the coming Chinese and the likely Saudi devaluations will push the dollar to a fresh high in this cycle.

I suppose it is possible for gold to go up in a surging dollar environment, even though historically that has not been a good environment for gold bullion. Over the very long haul, gold bullion tends to go up as the policy of central banks create inflation of about 2% a year, which remains the Fed’s stated target. That results in a constant decay of the purchasing power of the dollar. If dollars lose just 2% in value per year, adjusted for inflation over time, $1000 today shrinks in purchasing power to $42 in 100 years!

Consumer Price Index for All Urban Consumers Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Gold prices have historically been flat for 20 years (1981-2001), while gold companies have shown that they can go belly up in sharp sell-offs for gold bullion if their costs are out of whack. Investors constantly forget that a gold company is a leveraged investment, while gold bullion is a hedge against financial system instability – and a very good one at that. Those two are not one and the same thing.

Sector Spotlight:

*All content in "Sector Spotlight" is the opinion of Navellier & Associates and Jason Bodner*

A Collision of Galaxies is Coming!

by Jason Bodner

Many of us know that we are residents of a tiny planet located in a quiet outer arm of the Milky Way galaxy. Our nearest galactic neighbor is called Messier 31, or as it is more commonly known: Andromeda. At 260,000 light years across, M-31 is roughly twice as wide as the Milky Way. Scientists estimate that M-31 has around a trillion stars. That number dwarfs the most aggressive estimates for the Milky Way’s star makeup, which range somewhere between 100 billion and 400 billion.

Ironically, in our local cluster of 54 galaxies, Andromeda is the biggest one, while our Milky Way is the heaviest, because we have more dark matter, but the monster (M-31) is hurtling toward us at almost 100 miles per second! Scientists can’t always agree on the star counts of the individual galaxies, but they are unanimous in predicting one thing with a high degree of confidence: We are on a steady march towards a collision with Andromeda. That’s right; our two giant galaxies will smash together, converge, and eventually become one. Don't worry. You won’t be there when it happens, four billion years from now.

Colliding Galaxies Image

The market in 2016 has been on a collision course between the bulls and the bears. In January and early February, it seemed like the market was getting sucked into a black hole, while March and April seemed to lift like a Big Bang, or Phoenix out of the ashes. One thing we can  hope is that at some point in the future, the market may feel safe again. Unlike a predictable collision four billion years from now, the market’s erratic combination of short-term manic-depressive bursts is very hard to predict.

Here is a quick recap of the first four months of 2016:

  • January suffered the worst opening month on record. The S&P 500 then recovered a bit, finishing January down 5.07%, while the Russell 2000 finished -8.85%. The weakest sectors were Materials, Financials, and Healthcare.
  • February looked to be worse than January until the bottom on February 11th, at which point the S&P 500 was -5.73% in February (and -10.51% year-to-date). The Russell 2000 was down 7.89% (and -16.04% year-to-date). Then, the S&P 500 rebounded sharply to finish February down only 0.41%. The Russell 2000 finished -0.14% for the month.
  • March saw a swift rally with the S&P 500 finishing +6.60% (+0.77% for the year) and the Russell 2000 was +7.75% (-1.92% YTD).
  • April saw a rally that was almost painful to watch, as some of the previous “junk” sectors got way overbought. Last week, the rally lost steam with the S&P 500 finishing barely up: +0.27% for the month and +1.04% for the year. The Russell 2000 posted 1.51% for April and -0.44% for the year, while the NASDAQ 100 Index stands at -5.49% YTD.

Dancing to Different Drummers

Henry David Thoreau said, “If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. Let him step to the music which he hears, however measured or far away.” If we think of the market as music, we might prefer a steady, predicable parade march tempo, but the market sounds more like a mashup of frenetic Goth techno and horror film music.

Frenetic Goth Techno Image

The violent rotations continue as we see energy and industrials leading the market higher. This past week saw tech’s turn on the chopping block. Apple dragged on the market with its poorly received earnings report. Facebook and Amazon passed muster, but tech was clearly the laggard sector this week.

Let’s have a look:

Healthcare fared poorly last week. Reactions tend to be harsh for disappointing earnings, as Molina Healthcare’s price action served as an example of how volatility is still rampant. The stock fell 19.4% on its earnings release. The overall market was down last week, but utilities and telecom saw buying as the BOJ’s inaction showed that there may not be as much commitment to sustained stimulus as thought. (Jason Bodner does not currently own a position in MOH. Navellier & Associates does not currently own a position in MOH for any client portfolios.)

The three-month performance of the sectors looks tantalizing in isolation as all 10 sectors had positive performance with three of them posting double-digit gains. But those three were energy, industrials, and materials – extremely weak sectors last year. So when we look at the 12-month performance, we see a strikingly different picture of those sectors. This reminds us that all may not be so fine after all.

Standard and Poor's 500 Monthly Sector Indices Charts

Oil inventories remain elevated and oversupply is rampant. Yet as we discussed last week, fundamentals and technicals are two different animals. Technically, we have seen the energy bottom firmly set (at least for now), followed by a spectacular rally, but fundamentally we still have a supply glut overhanging oil.

As much as we may all want the market to march on a steadily predictable course, it is clearly marching to its own drummer. Rotations are frequent and swift. Skittishness is rampant and so is a false sense of security bred by recovery rallies. Is this latest sell-off just a healthy pause in a new bull market, or is it the beginning of a fresh swath of volatility for weeks to come? It's difficult to say, since earnings are mixed and not unanimously exciting as we enter the “sell in May and go away” window of market uncertainty.

What's to come? We know that eventually, markets even out and new engines of growth usually emerge. For now, the fundamentals need to be more convincing for me to feel comfortable with a sustained rally.  But whether or not I am comfortable with it, the recent rally may just continue marching higher.

A Look Ahead:

*All content in this "A Look Ahead" section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.*

Some Gems (and a Lot of Junk) Lead the Recovery

by Louis Navellier

Last week (in “Smallcap Losers Surge,” April 27), the folks at Bespoke Investment Group updated their decile matrix of the factors that have been driving performance since the stock market lows on February 11th.  Amazingly, some of the best performers were in the extreme deciles (top 10% or bottom 10%) with traditionally negative characteristics: (1) The bottom 10% in capitalization soared 42.5%, (2) the worst 10% in 2016 performance through February 11th surged 41.33%, (3) the highest 10% in price/earnings (PE) ratios shot up 33.11%, and (4) the highest 10% in short interest surged 29.93%.

In other words, your best bet in the market surge from February 11 to April 27, 2016 was a small cap stock with high short interest, a high P/E ratio, and a horrible start to 2016.  Clearly, the recent market rise comes from short covering and a rotation into beaten-down energy and commodity-related stocks.

Based on my 38 years of monitoring the stock market, I can tell you that junk like that usually doesn’t stay on top for very long.  There were some bright spots in the Bespoke report, however.  It also shows that the top decile of stocks with the highest dividend yields surged 28.3% since the stock market low on February 11th.  (For comparison purposes, the overall S&P 500 gained 14.5% in that same time span.)

Another sector with sound fundamentals also rose 28%.  Specifically, the bottom 10% of stocks with the lowest P/E ratios surged 28.3%.  These two segments show us that some stocks with good underlying fundamental factors have virtually doubled the market’s average gains over the last 11 weeks.

Corporate Stock Buy-backs Boost EPS

So far, among the companies in the S&P 500 that have announced their first-quarter results, positive earnings surprises are running at a 74% pace, higher than the 71% pace at the same time in the fourth quarter.

Aggressive stock buy-back activity may explain some of the underlying strength in the stock market in recent weeks.  As long as the Federal Reserve keeps short-term interest rates ultra-low, we can expect more companies to borrow money or issue bonds at low interest rates in order to buy back more shares.

The Financial Times reported last Monday (“Stock buybacks a boon to U.S. Q1 earnings”) that the proportion of stocks in the S&P 500 Index that have reduced their outstanding shares (i.e., bought back more shares) by at least 4% in the past year have risen to 30.3% for companies that have reported first-quarter earnings, up from 25.8% in the fourth quarter of 2015 and 21% in the first quarter of 2015.

Share Buy Backs Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Naturally, with fewer outstanding shares, corporate buy-backs help to boost earnings per share (EPS).

Today’s low interest rate environment is expected to persist in the upcoming months after the central bank comments last week.  Specifically, on Wednesday, the Federal Open Market Committee (FOMC) statement was incredibly dovish, since it cited a mixed economic environment due to lingering concerns over low inflation and slower growth.  Interestingly, the Fed noted that household spending has slowed even though real income has risen and consumer sentiment remains relatively high.  The FOMC statement sounded clueless when it said, “The (Fed) continues to closely monitor inflation indicators and global economic and financial developments.”  Translated from Fedspeak, the FOMC is frozen, confused, and full of trepidation, so they will probably do nothing, which may explain why the Fed left key interest rates unchanged.  Speaking of apprehension, I should add that the Bank of Japan on Thursday also left its key interest rates unchanged at -0.1% and maintained its quantitative easing at an 80 trillion yen ($718 billion) per year pace.  Overall, it increasingly appears that central bankers are confused, rudderless, and powerless.


It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Click here to see the preceding 12 month trade report.

Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier's judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor's holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier's Growth Investor, Louis Navellier's Breakthrough Stocks, Louis Navellier's Accelerated Profits, and Louis Navellier's Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters' reported performances should be considered mere "paper" or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates' Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier's composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

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