Still Stuck In A Rut
When a stock-market expert starts writing about crosscurrents and mixed trading in August, there's a good chance he or she is phoning it in from the beach. Still, at the risk of being labeled an expert, your editor submits the following:
• More than a month into earnings season, the market's trading range is unresolved. The S&P 500 Index and Dow Industrials closed within 1.2% of all-time highs on July 20 after some encouraging early reports. A week later, both were within 3.5% of six-month lows because of some shortfalls. The Dow Transports have bounced from lows reached in July, with well-received airline earnings countering some grim reports from the railroads.
• The S&P 1500 advance-decline line, a running total of daily advancing stocks minus daily declining stocks, has been moving mostly lower since peaking May 18. The capitalization-weighted S&P 1500 Index held up considerably better until July 20, when Apple ($115; AAPL) joined the slump.
• The energy, materials, and utilities sectors of the S&P 1500 are down more than 6% in 2015, while the health care and consumer discretionary sectors are up more than 10%.
• Investors are gravitating toward companies with good three- and five-year growth records, high returns on investment, and predictable earnings growth. As a result, the top one-fifth of stocks based on Quadrix Quality scores outperformed in 12 of the last 13 one-month periods through July 31. High Overall scorers outperformed in four of the past five months, as have high scorers for Momentum and Performance. Meanwhile, stocks with high Value scores underperformed in nine of the last 11 one-month periods.
For the 12-month period ended July 31, top scorers based on the key Value variables of enterprise ratio and price/cash flow ratio underperformed by a bigger margin than in all but 5% of the 271 rolling 12-month periods since 1992. The top one-fifth on earnings predictability outperformed by the widest margin since at least 1992.
• Despite seven months of sideways trading, few strategists are calling for a market crash. Yet, at 21%, the percentage of bulls in the survey by the American Association of Individual Investors is well below the long-term norm of 39%. According to Investors Intelligence, the percentage of bullish newsletters is 42.2%, the lowest level since October.
This year's trading range in the S&P 500 Index is the narrowest in 65 years. How this range is resolved will be crucial. With a close below 17,164.95 in the Dow Industrials, the Dow Theory would switch to the bearish camp. For now, our buy lists have 77.3% to 78.1% in stocks.