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Morning Commentary

Would-Buyers Holding more Cash

By Charles Payne, CEO & Principal Analyst
10/10/2018 9:13 AM
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It was another rocky session for the market, which couldn’t attract reluctant buyers with a few rally attempts.  There is no doubt, higher bond yields continue to be a cause for concern. The actual level is absurdly low, and in many ways, what’s occurring could help with the biggest threat to the economy and stock market rally- the Federal Reserve.

Toward the end of the session, yields slowed as selling volume faded.  Overnight, yields meandered at seven-year high levels, but bond buyers haven’t begun to rush in just yet. 

10-year yield

 

Biggest Warning

The stock of the day was PPG, which sold off more than $11.00, or ten percent, on volume that was 600% above its daily average after management issued an earnings warning.

The company, which began in 1883 as Pittsburgh Plate & Glass, pointed to raw materials and inflation as the main reason earnings would come in at $1.41 to $1.45 when they officially report on October 18th.   Consensus earnings estimate coming into the session was $1.52.

The full list for the short fall has broader implications especially for multinational companies.

Message for Investors

Currencies are more complicated for many companies, and those that have greater growth outside the United States would like to see the U.S. dollar pull back.  Meanwhile, oil could move higher from here in part to geopolitical factors.

Still, everything begins with demand.  More than likely, we have finally hit peak auto sales, and the softness in China could get worse before it gets better.  This isn’t about the trade battle per se, as China has a lot of issues that probably would have seen their central bank loosen lending requirements anyway.

Bottom line is, material names got hammered and is the worst performing sector of 2018.  There is value there, illustrated by news that Trian took a stake 2.9% stake in PPG before its worse session in a decade.

S&P 500 Index

-0.14%

Communication Services (XLC)

-0.06%

Consumer Discretionary (XLY)

-0.29%

Consumer Staples (XLP)

-0.22%

Energy (XLE)

+0.97%

Financials (XLF)

-0.39%

Health Care (XLV)

+0.17%

Industrials (XLI)

-1.54%

Materials (XLB)

-3.33%

Real Estate (XLRE)

+0.34%

Technology (XLK)

+0.36%

Utilities (XLU)

+0.41%

 

Buying value continues to be an attractive, yet deadly, proposition in 2018.  Make sure to have limited exposure to issues highlighted by PPG, especially industries hit hard by higher oil.

It was only a few weeks ago on September 14th when the Dow Jones Transportation index hit a new record high.  Since then, the index has been in freefall lead by airline stocks.

Bottom Fishing

Still, investing is about the long term and more money seeking out heavily sold names.

Across the board, I continue to see investors nibbling at oversold names in all sectors.  Gaming stocks Wynn and MGM were best performers in Consumer Disposables, while Advanced Micro and Broadcom were strong performers in the tech sector.

Momentum Trading

Speaking of which, while Facebook and Netflix rebounded, I was very impressed with Apple, which fetched a “sell” rating before the open, and Microsoft, which is proving to be a stronger cloud rival to Amazon than most thought it would be. 

Challenge

As for the board market, I think the reaction to higher yields is excessive to say the least, but it is necessary.  In fact, this action is typical consolidation after moves to all-time records and third quarter performance that was the best since the fourth quarter of 2013.

It doesn’t feel good, and there are a lot more losers than one would expect with overall averages up so much this year.  The challenge for investors, including big time find managers, is to balance exposure to high flying stocks and owning quality names that are still seeking terra firma.

Today’s Session

I continue to focus on the NASDAQ and NASDAQ 100, which has come down very fast even taking into account these are high Beta stocks.  Investors aren’t plowing money pulled from tech into other sectors as cash has become a more attractive place holder.


Comments
Do you think small cap stocks are still a good investment as the market is in its down spin.

Ray on 10/10/2018 11:55:11 AM
Do you think it is a good idea to move to a safer 401(k) fund and get out of small caps and other more volatile funds as the markets drop or hold steady for now

Ray on 10/10/2018 4:51:48 PM
 

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