Stocks market stages unexpected reaction after November Jobs Report comes in stronger than expected at 203,000.» Read More
With the major indices again at new highs, how to describe the market's relentless advance? I've been using the phrase "The Great Sector Rotation" to describe this, the idea that in 2013, no sectors have lagged for very long.
Art Cashin has suggested calling it "The Great Relay" because all year the sectors have taken turns passing the leadership baton back and forth.
So at one point, for example, technology may outperform, but never for very long. It quickly falls back, and something else--Industrials, Materials, Healthcare, whatever--takes its place.
That's what's remarkable: the whatever part. Usually there is a wider distribution of winners and losers, even when you are talking about ten sectors in the S&P 500.
But this year, every single sector in the S&P 500 is up at least 10 percent, and five are up 20 percent or more. There are no losers--just relative laggards. Nothing falls apart.
And even the laggards are doing well.
Look at the biggest sectors, and what they are doing this month alone:
The three biggest sectors by market cap are Tech, Financials, and Healthcare. All three are up roughly five percent this month.
Those three sectors alone are nearly 50 percent of the market cap of the entire S&P 500.
See what I mean? It has indeed become a relay.
Once again, we saw mixed reports from large multinational industrial companies. These are the sectors to watch: large multinationals that make heating and air conditioning systems, electric motors, truck parts, plumbing equipment.
Johnson Controls--which makes heating, ventilation and air conditioning (HVAC) systems as well as automotive interiors, beat on top and bottom line. Most importantly, they gave a preliminary look at 2014, saying "improving end markets will enable the company to modestly grow revenues in the upcoming year." They are expecting earnings to grow 30 percent in the first quarter of 2014, which is terrific.
Regal Beloit, which makes electric motors used in machines all over the world, also beat on the topline but was light on revenues. They had growth in power generation, and modest growth in China. They are buying a European motor company, which is pretty good.
As we pass the halfway mark for earnings, three themes are emerging:
1) Third quarter earnings growth is improving from the start of the month. Growth is at 4.5 percent with 67 percent beating expectations, above the historic average of 62 percent beating. Revenue growth is at 4 percent, with 51 percent beating, below the historic average.
2) Market rotation remains the main story this year; stocks have done well because different sectors have assumed leadership at different times of the year.
The NYSE is testing its systems this weekend in preparation for the Twitter IPO.
It routinely does testing of the systems on the weekend, but it went out of its way to announce it would be doing a specific testing for the Twitter IPO. Why make the announcement? More than likely it was aimed at Twitter, to make them aware the NYSE was doing everything possible to ensure a smooth open.
Here's what will happen:
First, outside brokerage firms (who are participating on a voluntary basis) will be able to connect to the NYSE systems and run a simulated auction. NYSE will put TWTR in its stock file, test order flow and connectivity, publish imbalances, then open the stock and let messages flow through the system, etc. The exchange may open up the system to do multiple test symbols, meaning it will test other stocks as well.
Decent earnings have been overshadowed by poor showing in Asia, and a weak U.S. durable goods figure.
UPS, for example, beat by a penny, helped by international package volume that was up about 6 percent; meanwhile, domestic package volume rose about 2 percent.
Of the 28 large companies reporting today, 9 missed on earnings while 14 missed on revenue. The trend continues: more are generally beating earnings estimates than the historical average (about 62 percent), while more are missing on revenues forecasts than the historic average.
For the third quarter (Q3), S&P Capital IQ now sees 4.1 percent growth in earnings and revenue growth of 3.9 percent. For Q4, an 8.4 percent increase in earnings, and 3.8 percent increase for revenue.
Several stock trends have been emerging in the past several days:
First: limited visibility for the fourth quarter. You can see this today in the guidance from big tech companies. Cree (CREE), Juniper Networks (JNPR), Altera (ALTR), STMicro (STM), and Broadcom (BRCM) all gave revenue guidance that was disappointing.
What's up? We have in-line earnings with weak revenue guidance. Two conclusions: a) expectations appear too high, and b) visibility during the critical Q4 season is not high.
Second: big momentum names are breaking down. For the second day stocks with heavy volume and high volatility are weak again...Tesla (TSLA), Yelp (YELP), LinkedIn (LNKD), Amazon (AMZN), Facebook (FB), Priceline (PCLN), and the Chinese internet names are weak.
Since Monday's close:
Chinese internet stocks:
Third: oil is dropping due to the weak economy and oversupply. West Texas Intermediate has gone from $110 a month ago to $96 and change today...the lowest level since June.
Good news for consumers and many companies that use oil and gas as a raw material, but bad news for investors in energy stocks.
Oil service company Nabors (NBR) reported a loss last night amid oversupply in North America. It's down five percent today along with many other energy names.
Fourth: bond yields are continuing to break down. Everyone was positioned the wrong way on this trade. Since the deal to reopen the government a week ago, the 10-year yield has moved from 2.75 percent to 2.48 percent in the last six days, the lowest yield since July. The weak Nonfarm Payrolls report yesterday was another catalyst for lower yields.
Interest-rate sensitive stocks have gained in that time: home builders (ITB) up 6.7 percent, Utilities up 4.7 percent, and REITs (VNQ) up 3.7 percent in the last week.
Fifth: the Euro/U.S. Dollar is at new highs for the year. Traders believe that the prospects the Federal Reserve will begin tapering its bond purchases have been put off until at least March of next year, which is weighing on the dollar.
The weak dollar is a boost for U.S. multinationals and is likely hurting European multinationals like Nestle or Mercedes. I would expect some earnings misses from European companies on currency strength if this continues.
Still, don't think this strength in the euro will last forever. The Europeans are going to push back soon, even though ECB head Mario Draghi has been relatively nonchalant until now. The ECB, for example, could even go to a "nuclear option" and put up negative interest rates.
Stocks are down globally. You can blame it on several issues--concern about inflation and high property prices in China, bank tests from the European Central Bank, or just lousy guidance from Caterpillar, but the most likely explanation is that stocks are greatly overbought. The S&P 500 is up 4.4 percent this month.
At about 10:50 a.m. ET a friend of mine said to me: "What happened to Apple? It just dropped $15 in a few minutes!"
Although we are waiting for news on the new iPads, there was no immediate news that would cause the stock to drop.
Welcome to the now-familiar era of momentum trading.
It likely all started when Netflix (NFLX), which opened up nine percent (at $387.84) and immediately began moving lower...but when it dropped below the previous day's close of $354.99, volume picked up and the momentum traders piled on...within six or seven minutes it went to$337 or so on heavy volume.
Predictably, all the big momentum names started going south, fast. Not just the usual suspects like Linkedin (LNKD) or Facebook (FB), but even Chinese internet names like Baidu (BIDU) and Sina (SINA) headed south fast.
In other words, there is a group of stocks that are heavily traded because they are 1) liquid (heavy volume), and 2) volatile (high beta). These are the characteristics that high-frequency traders, and even just plain old day traders, crave.
But when you can set the computers up to trade instantaneously, this is what you get in a very short period: a crowded, one-sided trade.
The Dow shed 70 points in about 15 minutes.
It's enough to make you nostalgic for specialists and SOES bandits. And if you know what a SOES bandit is, you've been around way too long.
Elsewhere, the early market gains were fueled by a collapse in bond yields around the disappointing September jobs report. Yields on the 10-year went from 2.58 percent to 2.54 immediately (a 3-month low), and to as low as 2.52 percent as the market opened; the dollar index dropped to its lowest level since February, and gold popped to its highest level in a month.
Stocks are rallying on the poor September nonfarm payroll report, which came in lower than consensus at 148,000 vs. 180,000 estimates. August was upwardly revised to 193,000 from 169,000.
Why the rise in stocks? It cements the view that the Federal Reserve will be on hold, likely until March. It never ends: October will be clouded by the government shutdown.
Barclays this morning said they do not expect tapering before March, but there are others that are already whispering about June.
The unofficial odds are rising that the Fed will announce taper plans at its December meeting.
Three Wall Street trade groups sued the Commodities Futures Trading Commission to stop tough overseas trading guidelines they fear.
Paid in the form of assistance programs, the funds are in effect a subsidy to the banking industry, The Washington Post reported.