The S&P 500 is Up

The S&P 500 is Up 10% in Three Weeks – What’s Next?

by Louis Navellier

March 8, 2016

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

Oil Pump Jack ImageThe S&P 500 is on the brink of 2000 again (closing at a tantalizing 1999.99 last Friday).  It is up three weeks in a row for a total of 10.5% from its intraday low of 1810 on February 11, but not all that growth is healthy, as I’ll show in my closing column today.  The price of oil is one unknown, with the market tending to rise or fall along with the price of crude.  Last Tuesday, crude oil prices rose on a Russian news agency report that major crude oil producers might decide to stabilize crude oil output later this month. However, on Wednesday, the American Petroleum Institute reported that crude oil supplies rose 9.9 million barrels, substantially higher than the analysts’ estimates of 2.6 million.  As the crude oil storage facilities hit capacity at Cushing, Oklahoma, companies are scrambling to store excess crude oil in rail cars and tankers.  Seasonal demand may be rising, but not as much as the crude oil producers anticipated.

Both the European Central Bank (ECB) and the Fed will hold policy meetings this week.  In Europe, the Bank of France governor Francois Villeroy de Galhau said last Wednesday that the ECB is ready to roll out new stimulus measures to combat deflation in the euro-zone.  Specifically, the ECB is expected to implement asset purchases and more targeted loans to commercial banks, while clarifying how long they will continue their negative interest rate policy.  Villeroy de Galhau said, “Falling oil prices can have more long-lasting effects on the prices of other goods and services as well as on the evolution of salaries.”  

Meanwhile, the Fed released a downbeat Beige Book survey on Wednesday, showing that six of the 12 Fed districts cited “modest” or “moderate” growth.  The previous Beige Book survey cited nine districts with those adjectives.  Three of the 12 districts were downgraded; two had “flat” activity and one (Kansas City) reported a modest decline in economic activity.  This Beige Book survey revealed no inflation pressure, which should keep the Federal Open Market Committee (FOMC) from raising rates this week.

In This Issue

In Income Mail, Bryan Perry will give us one more reason to be suspicious of this market rally – the lack of confirmation in the bond market.  Bryan quotes Yogi Berra and Gary Alexander quotes Alan Greenspan for their insights into the market’s inscrutable moves.  Then, Ivan Martchev updates the situation in the oil patch and in China, while Jason Bodner compares recent S&P sector switches to the “Doppler effect.”  In wrapping up, I’ll share my concerns over high P/E stocks and those with looming dividend cuts.

Income Mail:
Bond Mavens Are Unimpressed by this Stock Rally
by Bryan Perry
Employing Yogi-isms to Explain the Big Picture

Growth Mail:
Can We “Grow Our Way out of Debt”?
by Gary Alexander
Sustained Growth Will Be Problematic without Entitlement Reform

Global Mail:
Was This the Seasonal Low in Oil?
by Ivan Martchev
An Interview on China with Agência Estado, Part 2

Sector Spotlight:
The Simplest Answer is Usually the Right Answer
by Jason Bodner
Energy and Financials Led Last Week’s Rally

A Look Ahead:
The Latest Surge is Mostly a Short-Covering Rally
by Louis Navellier
Two Major Concerns – High P/Es and Dividend Cuts

Income Mail:

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

Bond Mavens Are Unimpressed by this Stock Rally

by Bryan Perry

Last Friday’s release of the February Non-Farm Payroll number of 242,000 new jobs added by the Bureau of Labor Statistics (BLS) was a hefty upside surprise, handily beating forecasts of 190K while the January number was revised up to 172K from 151K. On most trading days, these would be “Whoa, Nellie!” numbers and bond traders would be bracing for a gap-down move in the price of the 10-yr Treasury, and perhaps a limit-up spike in yields as a natural reaction. Not this time. Underlying the strong headline, the BLS reported that average hourly earnings decreased 0.1%, dropping the annualized earnings growth rate to 2.2% year-over-year from 2.5% in January. This puts the rate back into a lackluster range that has dogged the labor markets for years and virtually guarantees the Fed will not raise interest rates this week.

Then, to add further confusion to the mix, Friday’s upward revision of Atlanta Fed’s GDPNow forecast for the first quarter came in at 2.2% on March 4, up from 1.9% on March 1. The Atlanta Fed pointed to an increase in expectations for real consumer spending growth (to +3.3% from +3.1%) as the main reason.

Gross Domestic Product Forecast Image

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

The GDPNow forecast is a real-time snapshot of what the Atlanta Fed views is an accurate read on GDP growth. It is updated twice weekly. The emphasis placed on the labor markets by the Fed would seem to trump any other data points, making a surprise rate hike in March unlikely. However, after the jobs report was released on Friday, the fed funds futures market saw a shift in the expectations curve, signaling a 49% chance for a rate increase in September and a 52% chance in November (Source: Briefing.com).

When the European Central Bank meets this Thursday (March 10th), it is expected to cut its deposit rate by 10 basis points to -0.40%. The prior meeting in December failed to live up to expectations. Investors that were either long government debt or short euro positions were on the wrong side of those trades. This time around, market participants are less likely to bet on ECB President Mario Draghi’s bullish rhetoric and thus a more cautious posture by bond traders would lead to a positive reaction if the ECB gives what the market wants and expands its asset purchase program by 10 billion euro per month, as some expect.

If the ECB lowers the deposit rate and ups their asset purchases, it’s my view that the equity markets will like these actions and at least hold onto the market gains of the last three weeks. With that said, the major averages are all still in the red for 2016. Year-to-date (to March 4), the major indexes are down 2% to 6%:

  • S&P 500: -2.2% YTD
  • Dow Jones Industrial Average: -2.4% YTD
  • Russell 2000: -4.8% YTD
  • Nasdaq: -5.8% YTD

Beneath the headlines was a torrid move up for the junk bond market, accompanied by a surge in buy-side volume that sent the closely-watched SPDR Barclays High Yield Bond ETF (JNK) higher by +8.1% as noted in the one-year chart of the JNK shares below. Shares of JNK spiked off of a 7-year low in reaction to WTI crude trading up 3.9% to finish the week at $35.92 per barrel. Both the rally in oil and junk debt have all the markings of massive short covering, given the fact that weekly crude inventories as reported by the American Petroleum Institute were up 9.9 million barrels versus a forecast of 2.6 million barrels.

(Please note: Bryan Perry does not currently own a position in JNK. Navellier & Associates, Inc. does not currently own a position in JNK for client portfolios, and has not held this security in past client portfolios.)

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.

Driving the junk bond market higher were reports that Russia will host a meeting on March 20 between OPEC and non-members to renew talks of capping global crude output. Last Thursday, Bloomberg quoted Nigerian Oil Minister Emmanuel Kachikwu as saying that there will be a “dramatic price movement” when the meeting happens, adding that “everybody is coming back to the table.” 

Kachikwu said that producers hope to return crude prices to $50 per barrel. Qatar, Venezuela, Ecuador, Algeria, Nigeria, Oman, Kuwait, and the United Arab Emirates said they are ready to make an agreement that would be the first crude production pact since 2001. Iran and Iraq have welcomed steps to stabilize oil markets, but haven’t yet joined the deal. According to Russian Energy Minister Aleksandr Novak, producers of three-quarters of the world’s oil are ready to cap output to push prices higher.

In light of a growing number of energy companies suspending or cutting their dividends and slashing their capital expenditure plans, it may surprise you to know the energy sector is up 1.3% year-to-date as measured by the Energy Select Sector SPDR (XLE). That relative strength is helping to fuel the belief that a bottom has been found, buttressed by the continuation of the oil price rally in the face of bearish inventory data. With the rebound in oil prices, gas prices are likely to rise. If consumers haven’t been spending more freely with the drop in gas prices, why would they spend more if gas prices head higher? (Please note: Bryan Perry does not currently own a position in XLE. Navellier & Associates, Inc. does not currently own a position in XLE for client portfolios; these securities have been held in past client portfolios.)

Employing Yogi-isms to Explain the Big Picture

Quoting from the great Yankee catcher Yogi Berra, “When you get to a fork in the road, take it.”

That just about sums up the present investing landscape. No one wants to be short against a massive relief rally and yet the numbers for first-quarter S&P earnings are being adjusted lower following a dismal fourth-quarter reporting season. When the year began, the S&P 500 was trading at 16.9 times forward 12-month estimates; but now that the forward 12-month earnings estimate has been reduced to $116.45 from $121.13, according to S&P Capital IQ, the S&P is trading at 17.2 times forward earnings – or roughly the same P/E ratio as when the index was trading at its all-time high of 2134 last May, when S&P Capital IQ was forecasting $124 in earnings for 2016. I believe this decline in earnings forecasts accounts for why the yield for the 10-year U.S. Treasury Note is still camped out below 2.0%, currently sitting at 1.88%.

Yogi Berra Image

To borrow another Yogi-ism, the bond market is saying that “the future ain’t what it used to be.” If the U.S. economy were on a glide path to 3%+ GDP growth, it’s my view that the 10-year T-Note would be at or above 2.50% today. Back in January 2014, the 10-yr traded at 3.0% as per this 5-year chart (below).

Ten Year Treasury Yields Chart

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

Two years later the trend for the 10-Year Treasury – the most influential fixed-income security in the world – has been down, which runs counter to the newfound optimism in stocks. Based on lowered earnings guidance and the inability of the middle class to realize an uptrend in wage growth for nearly a decade, it’s a stretch for the Fed to pursue a tighter fiscal policy until the bond market has provided its blessing in the form of reversing the long-term trend higher.

Dictating policy to the markets – as the Fed did last December – instead of the other way around, has its costs, and equity investors suffered badly in January and February because of what the bond market is convinced was a hasty move. If upping the fed funds rate was the right decision, the stock market would have embraced it, as it would signal a return to bullish earnings growth ahead.

Janet Yellen and the Fed would be wise to take heed from the loveable old sage, Yogi Berra, who once said, “you’ve got to be very careful if you don’t know where you’re going, because you might not get there.” I couldn’t sum up the last seven years of financial engineering by the Fed any better than that. 

Yogi Berra died last September. Having played baseball in my formative years through high school, I always viewed Yogi as a living legend, beloved by both players and fans. He had a way of keeping it simple while maintaining a positive outlook and a great attitude on life. So, before the Fed decides to get ahead of itself and raise the fed funds overnight rate again, they might want to let more data cross the tape. If Yogi were still around, he’d probably say, “Hey, Janet, you can observe a lot just by watching.”

Growth Mail:

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

Can We “Grow Our Way out of Debt”?

by Gary Alexander

“I haven’t been [optimistic] for quite a while. And I won’t be until we can resolve the entitlement programs…. Nobody wants to touch [entitlements]. But it is gradually crowding out capital investment and that is crowding out productivity and that is crowding out the standards of living. Where do you want me to go from there?”

– Former Federal Reserve Board Chairman Alan Greenspan on Bloomberg TV, March 1, 2016

In the Sunday night debate between Hillary Clinton and Bernie Sanders, the words “entitlement,” “Social Security,” and “Medicare” were not mentioned once. The focus was on new spending programs. The CNN Journalist Don Lemon asked Hillary Clinton: “Senator Sanders has proposed a trillion-dollar plan but yours is only a quarter of that. Is your plan big enough to fix the crumbling infrastructure in this country?”

Alan Greenspan, former Federal Reserve governor (serving 1987 to 2006) turned 90 on Sunday. Last Tuesday, he sounded world-weary when he told Bloomberg TV that “I have never seen this many unknowns.” The once-verbose master of convoluted answers was asked if the economy was in trouble.  His response? “Yup.” Asked to explain, he simply said, “Because productivity is dead in the water.”

Greenspan basically said the same thing to me when I had the delightful opportunity to spend three hours with him as MC of the 2014 New Orleans Investment Conference. Half of that time was spent one-on-one, first backstage (reminiscing about his playing in New Orleans back in 1944) and then for a full hour on stage in front of a packed audience, where I asked The Maestro a few tough questions on Fed policy.

One of his most impassioned remarks came during the panel presentation after lunch. When I asked Mr. Greenspan about debts, he answered with a powerful warning: “We have a very substantial degree of entitlements in this economy, including Medicare, Medicaid, Social Security and a number of other programs. These programs are increasing close to 10% a year. This results in lower capital stock, lower productivity, lower savings and lower standards of living. Unless you want to repeal the laws of arithmetic, there is no way out. This bothers me immensely. We are eating our seed corn. We cannot do this indefinitely. Eventually we’ll run out of seed and therefore we will have no more harvest.”

My immediate response was “Wow! I can see the headlines now: ‘Eating our Seed Corn: No Way Out.’” Whatever happened to Fedspeak?! I’ve never heard a better one-paragraph summary of the debt crisis.

The other two gentlemen on the panel countered by saying we wouldn’t have an entitlement funding crisis if the Fed had not provided liquidity for entitlements. Greenspan fired back: “You have it all backwards. Congress mandates expenditures. Then, if the Fed does not provide the funds, interest rates would rise sharply and that would crowd out the private sector. Central banks are not the primary cause of the debt problem. They are the political response to government spending. They are not the initiators of spending.”

It’s time for our Congress and Presidential candidates to quit promising to increase spending and start to cut the over-reliance on our central government. On 60 Minutes a week ago (February 28), Social Security Inspector General Patrick O’Carroll said there is no death data for 6.5 million people in America over the age of 112.  In truth, there are only four verified Americans over the age of 112; but checks are still being sent to thousands of dead folks, with some families illegally cashing them. In addition, 60 Minutes reported that the USDA paid $1.1 billion in farm subsidies to 172,801 deceased farmers between 1999 and 2005, and the IRS paid $415,047,568 in tax refunds to 104,950 deceased persons in 2010 alone.Entitlements Consume All Tax Revenues Image

Federal government debt in the United States has risen from under 68% of GDP in 2008 to over 100% in 2012 and each fiscal year since then (see Wikipedia entry, “National Debt of the United States.”)

The only other time the U.S. debt-to-GDP ratio topped 100% was at the end of World War II, so today’s GDP/debt ratio is the highest in U.S. peacetime history. This trend is also evident in Japan and in the weakest nations (the so-called PIIGS: Portugal, Italy, Ireland, Greece, and Spain) of the Eurozone.

Debt to Gross Domestic Product Ratios Table

United States Gross Public Debt Chart

Sustained Growth Will Be Problematic without Entitlement Reform

It’s possible for any economy to grow its way out of debt, but can we? There are two parts to the answer:

(1) Politicians must stop running up mega-deficits.  The rhetoric on the campaign trail doesn’t offer much hope, since most politicians are promising more spending while giving only lip service to cutting “waste, fraud and abuse.” No candidate is taking a serious swipe at entitlements – the big elephant in the room, the source of the lion’s share of future deficit projections. One candidate (Sanders) promises increased Social Security payments, free healthcare for all, free tuition at state colleges, and a $15 minimum wage.

(2) The second half of the answer concerns business competitiveness. To grow, we must trade. We can’t afford a President who promises to close trade deficits by raising barriers to trade – which will then be reciprocated by our trading partners, leading to a trade war, which could replicate the dismal 1930s.

Those in a position to know are bullish on business. Jamie Dimon, president and CEO of JPMorgan Chase said in Naples, Florida on February 26 that the economy is strong and vibrant, not broken. “We have the best hand dealt of any country out there,” he said. Contrary to popular sentiment about sick banks, he said, “Credit is in great shape.” He is also a great market timer. On February 11 – the market bottom so far this year – he stepped up and bought $26.6 million of his company’s stock, according to CNNMonney.com). Good timing. 

The latest economic statistics offer a measure of hope. On February 25, The Commerce Department reported that orders for durable goods (goods expected to last three years or more) surged 4.9% in January. Manufacturing output also rose solidly in January and factory payrolls increased by the most since August 2013.

However, Mr. Greenspan is right in that there was a big decline in productivity last quarter and many economists have been commenting that this long-term productivity decline may limit wage growth.

Federal spending is out of control. Presidential candidates feel that they have to promise new spending programs to get elected, but if they have an ounce of fiscal responsibility, they will break those promises.

Global Mail:

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

Was This the Seasonal Low in Oil?

by Ivan Martchev

Many investors of late are wondering if this was a “bottom” in oil or merely a “low”? A bottom is a price that holds for a long time after a prolonged decline and emerges as an “area of support,” where buyers emerge every time the price nears that area. A low is just a zig lower in prolonged decline that gets taken out in the short- or intermediate-term as the decline resumes.

Oil prices are highly seasonal. They tend to be stronger in the March-September period and weaker the rest of the year. The fact that there are more people in the Northern hemisphere than the Southern hemisphere means that seasonal oil demand naturally rises in the driving season in the warmer months.

But what about cyclical demand and supply?

The Next Oil Glut Chart

Cyclical demand is related to China and its decelerating economy. China is the #1 consumer of oil and several other hard commodities and as such a hard landing in China, which I believe we are experiencing at present, suppresses cyclical demand for oil and other hard commodities. China has not yet experienced a recession but a sharp slowdown in growth which has caused a crash in the CRB Commodity Index.

I think a Chinese recession is coming so I expect more bad news from the commodity markets, including oil. Before the ultimate low in oil and commodities I expect more than one seasonal rebound to act as a false recovery. Oil, and commodities for that matter, are likely to bottom amidst bad news coming out of China. I am not sure if that bottom will be in 2016 or 2017, but the news simply is not bad enough, given what we know about the epic Chinese credit bubble.

United States Rig Count Chart

As far as supply, global oil inventories are at a record and drilling rigs in the U.S. have dropped down to 1999 levels when the price of oil was near $10 a barrel. The front-month April futures closed at $35.92 on Friday. Still, the frackers have been shoving more sand down the same oil well without new drilling in order to increase output in the most cost effective manner. That way they can “make it up on volume” so they can continue to pay their substantial debts. That production surge with very little new drilling only postpones the inevitable, where the most heavily indebted producers face a clear possibility of going bankrupt. We have seen a wave of dividend cuts, but we have not yet seen a wave of bankruptcies. What happens if Wall Street refuses to refinance bonds or the banks call the loans? We’ll find out in 2016.

Crude Oil Futures Curve Chart

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

It so happens that the oil futures curve has a positive slope. April 2016 WTI crude oil futures are at $35.92 but there is rising premium for every later month: April 2017 WTI crude oil futures are at $43.43. Long-term futures (to June, 2023) are above $51 at present. While I can’t see as far as 2023, I think futures dated a year from now are quite overpriced.

West Texas Intermediate Crude Oil - Monthly Nearest OHLC Chart

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

I think we are presently experiencing a seasonal rebound similar to the one we saw in 2015. I think it may have started a little early and in that regard it may have been front-loaded, i.e., we have seen the bulk of the rise in crude oil futures. I do not believe that with higher inventories than last year, and with Iran coming onto global markets in a major way after the lifting of sanctions, and with a more precarious cyclical demand in the face of China and other global consumers, we can rise meaningfully above $40/bbl, unless something really blows up in the Middle East, where we have a lull in hostilities at the moment.

With all those caveats, I do not believe that what we saw in February was a bottom in crude oil.

An Interview on China with Agência Estado, Part 2

A couple of weeks ago, a representative from Agência Estado, Brazil’s leading news service, got in touch with me regarding my views on China. He had read my Marketwatch column “Something Broke in China in 2016” and wanted to ask some follow-up questions. Since I was travelling on business, I agreed to provide the answers in writing. Last week, I included part 1 of the interview. Here is part 2.

Agência Estado: You said that the surge in financing is very similar to the mandate to lend at any cost in 2009. So why has the lending spiked again, now that the credit bubble is supposedly bust? Does this mean the Chinese government has absolutely no idea what it is doing? Or that maybe it is trying to prevent the bubble from collapsing too fast, or maybe because it is just that January loan numbers are always higher than the average over the rest of the year?

Ivan Martchev: I think the Chinese government has an idea what it is doing, I just think they are misguided in their belief that they can prevent a busted credit bubble from deflating. Seasonal trends aside, I think the surge in new lending may be intentional as the Chinese are famous for their command economy tactics. If a bank’s NPLs are surging, as I believe they are, the last thing a private enterprise concerned about its capital (book value) would do is accelerate lending. In China banks can accelerate lending if they are ordered to do so by the authorities even if their NPLs are surging. This surge in lending along with surging NPLs will create more losses later, but right now they think they can prevent those losses by ordering them to lend more. I think the Chinese authorities will make matters worse with this maneuver.

AE: Some economists say that the bearish analysis of the China economy tends to pay too much attention to “old sectors” like real estate and heavy industry, while ignoring the “new economy” – mostly service sectors, which already account for 50.5% of its GDP. Why do you think Chinese consumers won’t be able to “grab the baton and save the Chinese economy,” as you wrote in your column?

IM: I believe there has never been a case in economic history where the consumers grabbed the baton seamlessly after a fixed asset investment boom in any economy. Typically that happens after more than one recession. Because there is a credit bubble in China, I think the recession will be nasty.

AE:  Do you have any estimates on what will the Chinese government have to do once it recognizes this problem - the credit bubble burst? In case you predict a devaluation of the renminbi, how much will it be? How much will be the losses in the banking sector - and how much liquidity will the PBOC have to create to address the problem?

Renminbi Devaluation Chart

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

IM: All those are great questions but we can only guess. It is possible that 10% to 20% of loans will go bad. This is a massive number. In 1994 they devalued the yuan by 34% but China was a smaller economy then. It has grown 15-fold since, according to the China GDP 1960-2016 Chart from Trading Economics LLC. I think a yuan devaluation stimulates the economy via a different mechanism – not via the credit markets, which are not working properly – so they may devalue 20-40%.

United States Treasury Bond versus United States Inflation Rate Chart

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

I think that a Chinese devaluation is a massively deflationary event in the global economy. I expect that the U.S. 10-year Treasury yield will drop to 1% in a global deflationary environment on a safe haven bid and as the major developed economy with highest long-term interest rates at the moment.

Sector Spotlight:

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

The Simplest Answer is Usually the Right Answer

by Jason Bodner

Occam’s razor is a principle that says, all things being equal, the simplest explanation tends to be the correct one. We humans have a propensity to find a complicated answer to explain things. For example, look at how much entertainment we get from creating conspiracy theories. Most times, the truth is simple.

Did do you ever notice that when a police car or ambulance siren is approaching, you hear the siren drop in pitch as it passes you and then speeds away? This is a common example of the Doppler Effect. The change in the frequency of that sound wave occurs relative to the motion of the object emitting it and the observer receiving it. This simple concept actually led to one of the most stunning and profound discoveries of our time, which is the fact that the universe is expanding. Sir Edwin Hubble applied Doppler logic to light emitted from distant galaxies and observed something called the red shift effect.

Objects that move towards us exhibit faster wavelengths of light and move toward the blue end of the spectrum, whereas objects moving away tend to move towards the red end of the spectrum. Well, Hubble found that all galaxies emitted light in the red spectrum: light was shifting towards the slower end of the spectrum, which meant that all galaxies in space were moving away from us and speeding up as they did so. The best illustration of this is a balloon inflating; everything is moving away from everything else.

Expanding Universe Image

So why am I telling you all this? Well, there’s been no shortage of theories about what’s been going on in the market recently. But if we look at the data and look at the motion of the market relative to the economy, the answer can be quite simple. The stock market as a whole seems to have “gotten ahead of its skis” relative to how the economy is performing. When we think of it that way, we can begin to understand why high-multiple companies that were once in favor are now out of favor.

A stock that trades at a high multiple in booming conditions may actually be acceptable or desirable as it could be viewed as low relative to a forward looking P/E assumption. But as the data signals a shift in the underlying economy, moving from relatively rapid growth to static growth, investors may not want to pay a hefty P/E premium. Therefore, what was once in high demand suddenly can’t be sold fast enough.

This is what we’re seeing in today’s stock market. We’ve talked before about higher P/E multiple stocks getting taken out to the woodshed. Investors just don’t want to pay a gross premium. We see that in all the sectors now. It’s like that siren that was coming at us fast – it now sounds different as it speeds away. These stocks looked great with economic growth. They look totally different as we encounter head winds.

When we put it in this context, it’s easy to understand why sectors like biotech and healthcare came under such heavy attack when political rhetoric emerged discussing price gouging and the future earnings of these companies. The same could be seen for nearly any sector with high-multiple growth scenarios.

As Louis Navellier discusses below, Bespoke shows us that the worst-performing stocks over the past few months (before the bottom on February 11) have been the ones performing the best in the latest rally. So some hedge fund managers, investors, and traders who had been heavily shorting high-multiple stocks to oblivion decided enough is enough. They started to cover, which triggered a much bigger, broader rally that we have been seeing over these past few sessions. This is why it’s easy to be distrustful of this rally.

Energy and Financials Led Last Week’s Rally

As we look beneath the hood of this past week’s positive price action, we need to ask: Was it constructive? Let’s look at how the sectors performed for the week:

Standard and Poor's 500 Weekly Sector Indices Tables

Last week the S&P 500 Energy Index rallied 5.79% and the S&P 500 Financials Index rallied 4.46%. These two have been among the worst performers since late December. The biggest winners for the past three months, Telecom and Utilities, despite having decent positive performance this past week, lagged relative to Energy and Financials. Even with this past week’s sharp rally, the S&P 500 Financials Index is down 11.17% for the last three months and the S&P 500 Energy Index is down 25.76% for 12 months.

Standard and Poor's 500 Monthly Sector Indices Charts

So as we scratch our heads wondering what the next source of real strength in the market will be, we want to focus our attention on finding stocks with the strongest balance sheets, the healthiest financials, and a solid dividend on top of it all. I’ll continue to keep my finger on the pulse of the market by monitoring sector movements and rotations; but the next time you see a violent and seemingly unexplainable move in the market, just remember that there may just be a simple explanation.

Sigmund Freud may have said it best when he said, “Sometimes a cigar is just a cigar.”

Sigmund Freud Image

A Look Ahead:

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

The Latest Surge is Mostly a Short-Covering Rally

by Louis Navellier

The most interesting news last week (other than the Presidential race) was how Brazil’s stock market surged 18% followed by the arrest of former president Luiz Inacio Lula da Silva in conjunction with the Petrobras corruption scandal.  Clearly, the surge in Brazilian stocks is a massive short-covering rally.

The U.S. stock market has also been led by a short covering since the February 11 lows.  In a report last Wednesday (“The Revenge of the Losers”), Bespoke Investment Group essentially said that the stocks with the largest short interest and the worst year-to-date performance before the market low on February 11 saw the biggest bounce in the last three weeks.  The good news is that when low-quality stocks lead via a short covering, it signals a definitive bottom.  However, I don’t expect these low quality stocks to lead much longer.  I expect that the stock market leadership will revert to quality in the upcoming weeks.

The S&P 500 is now well above its 50-day moving average, so some investors are starting to think that the correction and recent bear market must be over.  The S&P 500 surged 2.39% on Tuesday and had its strongest start to March ever.  (See USA Today’s article, “Amid market madness, slam-dunk start to March”, published March 2, 2016.)  What really drove the surge last Tuesday is that the “black hole” that was swallowing energy stocks and some big banks apparently “burped.”  But after that “burp,” the deflationary black hole is expected to continue engulfing companies that cannot sustain positive sales and earnings.

In the meantime, the energy sector has surged over 20% in recent weeks.  This is the fourth time in the last 16 months we’ve seen a major (15% or greater) short-covering energy sector rally.  But it will be tough for most energy stocks to hold onto these gains if they announce dividend cuts or negative earnings in April.

Two Major Concerns – High P/Es and Dividend Cuts

So despite an impressive rebound since the market lows on February 11, the overall stock market is still undergoing two corrections under the surface.  Specifically, there is still a serious internal correction underway in high P/E stocks as well as in many dividend stocks.  So essentially the froth in the stock market is still fizzling and the foundation under many of the big dividend stocks is showing some cracks.

The fourth-quarter earnings announcement season is now effectively over and the average stock in the S&P 500 posted a -3.6% annual earnings decline, which is the worst bottom-line result since the third quarter of 2009.  Looking to the first-quarter results that will commence in April, the S&P 500 will likely post negative sales for the fifth quarter in a row and negative earnings for the third quarter in a row. Clearly, the negative sales and earnings environment for the S&P 500 is due to deflationary forces.

I expect that last year’s market leaders, namely Netflix (the #1 performer in the S&P 500 in 2015) and Amazon.com (the #2 performer in the S&P in 2015) will remain under selling pressure, since Wall Street is no longer in love with high price-to-earnings (P/E) stocks with erratic earnings.  This P/E compression will likely persist, since “growth at a reasonable price” is now dominating my growth stock screens. (Please note: Louis Navellier does not currently hold positions in NFLX or AMZN. Navellier & Associates, Inc. does not currently hold positions in NFLX or AMZN for client portfolios; these securities have been held in past client portfolios.)

My second concern is that many high-dividend stocks continue to struggle.  As I said last week, Standard & Poor’s Howard Silverblatt has pointed out that we are now in the midst of the slowest annual pace of dividend growth since 2009, when dividends grew at a 9% annual pace.  The good news is that despite these market woes, the U.S. is still doing much better than most of the other major economies around the world.

So essentially, I remain concerned that the recent corrections in high P/E growth stocks will likely persist. “Growth at a reasonable price” and “persistent dividend growth” should drive the next market surge, but the current market environment has become so narrow that we are having a hard time finding good new stocks to buy, but we are confident that this narrow range of stocks will lead the market recovery.


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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