This week we saw a strong rally in the stock market that was due more to investors covering short positions than anything else. This was further supported by the Bank of America Merrill Lynch which noted that another $5 billion left equity funds last week despite the up-tick in prices.
The S&P has been stuck in a trading range with counter-trend trading (buying off key support levels and selling at key resistant levels) proving to be the most profitable short-term strategy. Until the market breaks out of this trading range in one direction or the other, the argument between a continued bull market or an impending bear market will rage on. With the S&P again testing the key 2000 support price level, albeit to the upside this time, we will soon see which direction the market will likely end the year at, as key corporate earnings announcements begin in earnest this week.
Speaking of earnings. The early warning sirens sounded by Yum Brands and Caterpillar should serve as notice for caution with any of your multi-national conglomerate holdings. Earnings were impacted across segments for both companies with Caterpillar guiding its 2016 revenue down another 5% after previously decreasing their 2015 earnings guidance.
On the flip side, some experts are pointing to high auto sales as a sign that the U.S. economy is doing well and consumers are more confident as evidenced by these large purchases. I’m not buying into that as a portion of those revenue numbers have been driven by increased loan terms (6 and 7 years), sub-prime credit and the fact that the average age of cars on the road necessitates more of them being replaced, whether the owner can afford the additional debt or not. In addition consumer debt levels have risen due in part to the inability of consumers to earn any interest of their savings.
That has led me to pass on a handful of auto stocks and auto supply stocks that appear to be at attractive levels due to their current earnings surge. As always, I’m not looking for short-term pops but 12 month or longer moves.
We will have to continue to watch investor sentiment regarding any possible rate hike by the FED. Depending on their decision I would not be surprised by a move to the upside or downside, but feel very strongly that any move to the upside will be limited due to current valuations and earnings expectations.