CWS Market Review
June 23, 2017
“Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.” – Peter Lynch
The stock market easily survived the Federal Reserve’s recent rate hike. In fact, the S&P 500 touched a new all-time high as recently as Monday. However, aside from the new high, the chief characteristic of the market continues to be its very low volatility.
Simply put, the market ain’t doing a whole lot of moving around lately. This seems at odds with so many of the headlines we see coming from around the world. Here’s a remarkable stat: seven times in the last eleven trading sessions, the S&P 500 has closed up or down by less than 0.1%. That’s a very small move.
If the market were to average daily changes of 0.1%, that would mean the Volatility Index (VIX) should be less than 2. The takeaway is clear—we’re living in a volatile world with extremely chill financial markets.
Frankly, we’re in the midst of a lull period for the stock market. I don’t expect much action from the markets until the second-quarter earnings season begins in another few weeks. While there hasn’t been a great deal of action for the overall market, there have been some growing currents underneath the surface.
As the second quarter wraps up, Wall Street is experiencing a pronounced sector rotation. The tech sector is getting wobbly. Healthcare stocks are finally coming to life, and oil is dropping like a stone. Also, many retail stocks are in full retreat. I’ll tell you what it all means. I’ll also run down several of our Buy List stocks. Plus, I have several new Buy Below prices for you. But first, let’s take a closer look at where the economy and markets stand at the middle of the year.
The Stock Market’s Quiet Sector Rotation
The market continues to be quiet and upward. In the last 43 trading says, the VIX has closed over 11 just four times. The S&P 500 has already set 23 new highs this year, and we’re not even at the midway point yet. By historic standards, that’s a high pace.
But not all stocks are equally calm. Two weeks ago, the Tech Sector got dinged for a 2.5% loss. Actually, the selloff on June 9 wasn’t that big by historic standards, but it was gigantic by 2017 standards. Tech stocks are starting to settle down, but there could be another move down for them. Fortunately, Microsoft (MSFT), our large-cap tech position on the Buy List, is holding up well. I’m going to keep our Buy Below for Microsoft at $70 per share. This has been a very solid performer for us. I’m looking forward to another good earnings report next month.
The healthcare sector badly lagged the overall market from the middle of 2015 until the early part of this year. Since then, healthcare has become increasingly popular. In fact, the Healthcare Sector ETF (XLV) has now beaten the overall market for seven days in a row. A lot of this, naturally, surrounds the debate about healthcare reform. I won’t speculate on the political debate, but the U.S. Senate has moved forward with a bill of its own. The bill in its current form probably won’t go very far, but it could serve as the starting point for a negotiation. In any event, many healthcare stocks are acting much better.
On our Buy List, the healthcare rally has been good news for Express Scripts (ESRX). If you recall, the pharmacy-benefits manager dropped more than 10% after they said they’re losing their largest customer. The shares have gained back more than 8% since then. This week, I’m raising my Buy Below on Express Scripts to $69 per share.
I think it’s interesting that healthcare is improving while retail is falling. Perhaps rising premiums are taking a bite about out of shopping plans.
Perhaps one of the more surprising moves lately has been the downward spiral for oil. Many traders had assumed that OPEC had finally wrested control of oil from the bears. Not so. Since May 23, the price for spot West Texas crude has fallen from $51.47 per barrel to $42.74 per barrel. This week, oil touched a 10-month low. This is especially bad news for OPEC because it took a lot of arm-twisting to get all the members on board for the production cuts. Now prices are lower than when they started.
This has been especially difficult for energy stocks. The Energy Sector ETF (XLE) broke $76 per share late last year. This was part of the Trump Rally. This week, the XLE broke below $64 per share. Fortunately, we don’t have any major energy stocks on our Buy List. This wasn’t a prediction on the macro economy from me. Rather, I just didn’t see any energy stocks I liked at the moment.
Amazon’s (AMZN) surprising move to purchase Whole Foods (WFM) has shaken up many consumer and retail stocks. The market apparently thinks this is bad news for stocks like Hormel Foods (HRL) and JM Smucker (SJM). I don’t see why, but the market doesn’t always think these things though.
Shares of SJM have dropped for the last seven days in a row to reach a new 52-week low. The shares now yield 2.5%. This looks to be a good buying opportunity for SJM. I’m going to lower my Buy Below on Smucker to $131 per share.
The real loser in the retail sector of late has been Ross Stores (ROST). I still like Ross a lot, but the stock has been a dud lately. In the last three weeks, ROST has lost over 12%. The deep discounter has proven itself to be one of the few “Amazon resistant” retailers out there. Let’s also remember that Ross has recently raised its full-year guidance, plus they increased their dividend by more than 18%. I’m going to drop my Buy Below on Ross down to $59 per share this week. The next earnings report is due out in mid-August.
Since the beginning of June, the Consumer Discretionary Sector (XLY) and Consumer Staples (XLP) have both been laggards. I’m not sure if this trend will last. I noticed, for example, that this week, we got a very good existing-home sales report. For May, existing-home sales rose 1.1%. This was the third–highest report in the last 10 years. On a year-over-year basis, housing inventory has dropped for 24 straight months. That’s probably a decent sign for consumer spending. I should also note that initial jobless claims have now been below 300,000 for 120 straight weeks.
Buy List Updates
Shares of Alliance Data Systems (ADS) have drifted higher recently. The stock rallied after its earnings report in April, but lately gave most of it back. ADS has now climbed for the last six days in a row. This week, I’m raising my Buy Below to $264 per share.
Cerner (CERN) has been a big winner for us this year. It’s currently up 42% YTD. This week, I’m going to bump our Buy Below up to $68 per share.
CR Bard (BCR) isn’t slowing down since the acquisition was announced. The stock just touched another 52-week high this week. The merger with Becton, Dickinson seems to be going well, and both stocks are drifting higher. I’m keeping my Buy Below on BCR at $330 per share.
This week, Stryker (SYK) announced that it’s buying Novadaq Technologies for $701 million. Novadaq is a Canadian fluorescence-imaging technology manufacturer. The deal is expected to dilute Stryker’s earnings by three to five cents per share, but it will have no impact of their full-year adjusted earnings. Stryker’s current guidance for this year is $6.35 to $6.45 per share. I’m raising Stryker’s Buy Below to $145 per share.
That’s all for now. Next week is the final week of trading for the first half of the year. It also marks the three-quarters mark for the decade. On Monday, we’ll report on orders for durable goods. Then on Tuesday is consumer confidence. On Thursday, the government will give its second revision for Q2 GDP. Last month, the government revised Q2 growth from 0.7% to 1.2%. That’s not very good. On Friday, we’ll get the personal-income and spending data for May. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!