A long over due correction in January raised concerns for investors, many of whom were expecting the markets to drop further. Yet, like they have been doing for several years, stocks bounced and several of the major benchmarks rose to new highs. Treasuries remain in a trading range and commodity prices have been on the rise as mixed evidence about the strength of economic expansion remain a focus both domestically and globally.
Investors, traders, and portfolio managers have been, and continue to be, expecting a large significant correction, one that meets the traditional definition of a correction. Bulls would embrace it as an opportunity to buy shares at a deep discount and Bears would view it as a start of a new bear market. However, despite the desire for one, the traditional correction continues to elude all that seek it.
The peak-to-trough correction for the Dow Jones Industrial Average (DJIA: 16,321.71) was 7.4%. In our view, a decline like that over a two peak period, is classified as an “Untraditional Correction,” and is as significant, if not more, than a traditional style correction. There have been a number of such corrections over the last few years, which continues to frustrate those that manage money.
In February, the DJIA gained 4.0% and the S&P 500 Index (SPX: 1,859.45) rose 4.3%. Meanwhile the Russell 2000 Index (RUT: 1,183.03) jumped 4.6% as small-cap issues outperformed their larger cousins. This is a sign that investors are looking for growth and taking on risk. That helped the Nasdaq Composite Index (COMPQ: 4,308.12) to surge 5%.
Commodities are Mixed BagCommodity prices have been on the rise for several reasons. Precious metals and energy prices have climbed as geopolitical pressures, especially those in Eastern Europe, have led gold prices to rise 6.7% last month, partly on fears of a terrorist attack at the Winter Olympics. Prices have been rising since the start of March due to the events in the Ukraine. Silver has risen for the same reasons.
Russia's involvement in the Ukraine is also partially impacting energy prices. West Texas Intermediate Crude Oil added 5.2%.
Tensions were not the only cause of rising commodity prices. Weather played more than its fair share in the participation. Natural gas prices had rocketed higher, peaking on February 24, before turning sharply lower and recording a 5.7% loss for the month.
Agriculture prices have been rising due to severe weather around the country. Record cold, snow and ice have impacted nearly 2/3 of the US while a severe drought in the West have done damage to both crops and herds.
CurrenciesThe US Dollar Index (DXY: 79.76) eased 1.8% in February. Weakness was noted against the euro, British Pound, Swiss Franc, and New Zealand Dollar. The “greenback” gained ground against the Japanese Yen.
The FedAs the Fed continues to taper, and the economy expands, there are those that applaud and those that disapprove of such actions. Meanwhile the Fed has stated that it ha no plans to raise rates any time in the near future. Geopolitical events, that we noted earlier, have caused volatility in the treasury markets. The yield on the benchmark 10-year T-note ranged from 2.579% to 2.781% last month.
The EconomyConsumers and retailers have been hit hard by the weather. Severe cold, snow, and ice have kept people indoors more than usual this winter, and cabin fever is rampant. From grocery to electronics stores, consumers have been absent from the floors of chain brick-and-mortar shops as well as those of small proprietors. Retailers have also been plagued with delayed shipments and potentially extra costs due to the weather.
Auto sale in February dropped about 300,000 vehicles from a year ago, the third consecutive monthly decline. Manufacturers are now looking at incentives in a hope to regain those losses.
Meanwhile airlines, passengers, and airports may have lost nearly $6 billion this year due to weather related cancellations, according to USA Today. First quarter Gross Domestic Product (GDP) may have lost more than $50 billion in productivity and job losses, according to reports.
The estimate for 4Q GDP was reduced to 2.4% from 3.2%, a sharp revision. Consumer spending was down along with government spending.
The Consumer Confidence Index sank to 78.1 from 79.4 in January as future expectations declined.
Equities, A Deeper ViewLast month most of the internal market indicators, such as the advance-decline and new high-new low indices, were rolling over. However, as the market turned higher, we have seen dramatic improvement in these gauges, and recently all of NYSE and Nasdaq indicators were setting new highs.
Another yardstick that we carefully watch, the percentage of stocks trading above their 200-day moving averages, was also sharply higher. In fact, the reading for the NYSE reached a high of 76.18%, the highest reading since last May 30th. This shows that 3/4 of the issues traded on the “big board” are above their 200-day moving average.
Options traders have seen risk levels rise and fall. Most sectors, at this writing, have implied risk levels that are basically non-existent. Yet the CBOE S&P 500 Implied Volatility Index (VIX: 14.00), commonly referred to as “the fear gauge,” has been unable to break and remain below the 14 level, an indication that traders are not as complacent as they were in January.
The strongest industry groups in February included education services (+15.7%), building products (+10.6%), tires & rubber (+10.4%), retail & pharmaceuticals (+10.0%), and publishing & printing (+9.9%). The weakest groups included healthcare facilities (-4.3%), human resources & employment services (-4.2%), cable & satellite (-3.0%), integrated telecommunications (-2.9%), and gas utilities (-2.5%).
What To Watch ForDespite the fact that the correction appears to be over, the market remains very sensitive to news, especially of the negative variety. We are also seeing industry rotation, some of which is due to seasonality while other is due to changes in investor and trader sentiment.
We were encouraged by the positive breakout last week for the Dow Jones Transportation Average (DJTA). As the chart shows, DJTA broke to a new all-time high, one half of the parts needed for a “Dow Theory Buy Signal” to be maintained.
Our outlook remains positive but note that the markets advance has been narrowing in scope. As a result this is becoming more of a stock pickers market, and we are carefully selecting candidates that offer some defensive characteristics.
We expect the market to continue rising, es-pecially over the next several weeks. Seasonal fac-tors are working in our favor but traditionally that ends between mid-April and the beginning of May.Michael J. Levas has been in the investment management business for over 25 years and is the founder, senior managing principal & chief investment officer at the Olympian Group of Investment Management Companies. Prior to Olympian, he was a VP and Portfolio Manager in the ... View Full Bio