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Afternoon Note

The Herd

By Charles Payne, CEO & Principal Analyst
1/3/2019 1:43 PM
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Today’s session began with a series of major news events.  Apple (AAPL) warned after the close last night, which pressured the market out the gate.  But it was down less than early indications after we heard Dallas Fed President Robert Kaplan suggest rate hikes should be shelved for a couple of quarters and quantitative tightening reconsidered.

There was the mega biotech deal, Bristol-Myers (BMY) to buy Celgene (CELG), and the ADP jobs report crushed Wall Street consensus.

The market was finding its footing with the Dow off 380 points when the ISM Manufacturing report missed consensus, expanding at the slowest pace in two years.  A trapdoor opened, and in a flash, major indices saw losses almost double.

A two-day chart reveals the late spurt in yesterday’s session that saw the Dow rally 155 points in the final ten minutes of trading.  There was a chance the market was going to close higher today, but that’s seems farfetched after the algorithms overreacted to the ISM headlines. That said, if the Dow is above 23,020 into the final hour of trading, anything could happen.

Investing Lessons from 2018

Buys & Low PE Ratios

Avoid the Wall Street bandwagon.  Six months ago, there was a daily race on Wall Street to see which analyst could have the highest share price target on Apple.  Interestingly, as everyone was loving the stock, Apple shares traded at valuation metrics significantly below its rivals.

Turns out that maybe those reasons to buy the stock were reasons to avoid the stock.

Bandwagon

A great research piece from FactSet reveals the stocks with the fewest Buy ratings as a percentage of overall analyst’s coverage had the best performance in 2018.  Conversely, those stocks where everyone was on the bandwagon finished the year with the worst performance.

Percentage of Buy Rating

Coming into today’s session, Apple shares, which has seen an avalanche of lowered targets, and it still has a majority of firms with Buy ratings as a percentage of its total coverage, were changing hands at “cheap” valuations:

This says a lot about the market versus the experts.  One obvious problem when everyone has a Buy on a stock is the next change can only be downgrades.  Moreover, companies only need to miss those high hurdles once to disappoint the crowd.

The investment lesson reminds us that Wall Street still thinks as a herd and can be just as much a contrarian indicator as individual investor sentiment.  In addition, sometimes cheap stocks are cheap for a reason – they are supposed to be cheap.


Comments
I THINK YOU OUGHT TO COUNSEL TONY DWYER HE WAS CRUCIFIED IN 2018
HE AND SIEGEL ARE ALWAYS BULLISH THEY DONT EVER THINK THE MARKET CAN GO DOWN
I THINK THE ISM REPORT MAY BE THE STRAW THAT BREAKS THE CAMEL'S BACK
AS THEY SAY IN AIRBORNE SCHOOL.STAND IN THE DOOR GO!



ERNEST REMUS on 1/3/2019 2:18:09 PM
Bring back the uptick rule!

Raymond Kotwasinski on 1/3/2019 5:14:52 PM
How about talking about the old Uptick Rule and how it could reduce variability?

Ray Kott on 1/4/2019 7:52:23 AM
 

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