The market entered official "correction" territory, with the S&P 500 trading more than 10% below the intraday high reached in the first trading session of the quarter on April 2nd, closing at the lows of the day and slightly below the 1280 level I had suggested might be support. Here is how the models looked one day into the new month:
In case you missed it, I posted a review of May on the blog. As a reminder, you can always access the blog easily by logging in and clicking on "blog". While I email quarterly reviews and weekly commentary, I always share end-of-month reviews as well as trade descriptions on the blog. If you use Twitter, you can follow me for notification of updates to the blog.
Top 20 had a terrible day to cap a terrible week. While the model is still up YTD, we are now slightly lagging the S&P 500. We are well ahead of the Russell 2000 index of Small-Caps, which is up 0.07%. For the week, the model dropped 4.5%, losing about 1.5% more than the S&P 500. This week marked the four-year anniversary of Top 20, and, while we are in a rough patch at the moment, it's worth recalling the history of strong performance the model has enjoyed. The S&P 500 is up a total of 1.63% since our launch (including dividends), while Top 20 is up 84%. We don't win every single quarter (this data is available on the website under the performance tab, where we break it down by quarter and by year), and we tend to do a bit worse than the market when the market is weak, but we almost always make up for it when the market recovers, as it ultimately does. We also tend to do better when the market is at its worst, like in 2008 (due to our focus on strong balance sheets). While I have suggested that finding wildly mispriced (cheap) securities was a lot easier in 2009 than in 2010 and even the first part of 2011, I am quite confident about the potential of the stocks in the model currently.
Conservative Growth/Balanced declined 2.38% this week, which was almost 1% worse than the stock/bond blend. The bulk of this poor relative performance was due to being overweight stocks and underweight bonds.
Sector Selector ETF had an interesting week, declining "only" 2.54% and beating the market by about 0.4%. This strong relative performance came today, as the precious metals ETF soared. I had been a little early adding down in the hole to this one, but I believe that it offers a nice diversification potential as well as capital gains opportunity. We are up 12% on the last purchase, but the first two buys are still below cost. With the big jump up as the stock market has melted, I am inclined to consider taking some profits on the recent addition in the coming days, especially if it can advance a bit as the rest of the rest of the market tests the lower end of the 1250-1280 zone of support.
Outlook
Between my update this morning and what I shared last week, I really don't have much to add. Let me just repeat what I said last week first and then I will try:
I don't have much of an update this weekend. While it was encouraging to see the market bounce and get back towards the 1320-1350 zone that I had expected to be support for the S&P 500, we closed below it. At this point, we are still in correction with no signal yet that the low is in. I shared some levels that might be tested, including the possibility of a slight breach of the 2011 closing price of 1257.6. Longer-term, I remain constructive, but, in the short-term, we are contending with some volatility related to Europe once again. It's always hard to tell "what's priced in" , and the challenges to the global financial system are certainly out-of-the-ordinary, but we emerged from the 2010 and 2011 by printing new post-2008 highs both times. The 2012 correction has been less severe (so far) and hasn't been nearly as volatile as the prior two years. After two very strong quarters (Q4 and Q1), it's not at all out of the ordinary to retrace a bit. We should get some news out of Europe in mid-June regarding the potential for a Greek exit from the Euro. Until then, I expect that we could base between 1250-1280 and 1370.
So, here we are, at the high end of that zone. I have no crystal ball, but I do have some tools that I can use. They are telling me to remain patient before conveying that the lows are in, as the market isn't oversold enough to warrant a reversal in and of itself. With that said, the bad news of today and this week (not just U.S. employment weakness, but also data out of China and India) could be a catalyst for coordinated activity by global central banks. The problem is that haven't we "been there, done that"? There are some big events ahead in June: Supreme Court ruling on Obamacare, Greek elections (6/17), and a European leader's summit (6/22). I do know that markets turn on a dime, and the big move in gold today may be a precursor to coordinated action. As I mentioned this morning on the month-end review, perhaps it could inspire our inept political leaders in Washington to address the "fiscal cliff" sooner rather than later. Markets hate uncertainty, and, as of now, we are on auto-pilot to fly into a potential double-dip recession if we push through the scheduled spending cuts and tax hikes.
While the market doesn't feel quite as bad as it did at the lows in October, we finally have had several big down moves, though nothing like what transpired after July of last year into October or in the previous year following the May flash-crash. I still see tremendous value in stocks and horrible value in government bonds. My economic outlook has been for "muddle along", and that's what we have. I tried to be cautious at the end of March, but I really didn't anticipate the extent of the contraction, especially among the smaller stocks that I tend to favor. 5-7% has turned into 10-12%. After two back-to-back spectacular quarters, Q2 has retraced about 41% of the move in the S&P 500. The 1250 level is approximately the halfway mark, which I suspect should contain this correction. Hopefully, we are close to the end of the move.
Articles
- 10 High-Yielding Dividends Stocks Evaluated for Safety - Seeking Alpha
Enjoy the weekend...
Alan Brochstein, CFA
www.InvestByModel.com
