Editor’s Note: While Sam Collins is on vacation, we’ve asked Nick Atkeson and Andrew Houghton, editors of Big Money Options, to provide you with a comprehensive market outlook until Sam returns June 1.
The S&P 500 (SPX) held up fairly well last week in the face of $34 billion of equity supply being introduced to the market during the past two weeks and news that April retail sales were down 0.04%, the second down month in a row.
After a 31% run in the S&P 500 since the March 9 low, many investors feel a pullback is overdue.
Today, homebuilders will release their May housing index, which some expect to reach its highest level since last September. The good news is expected because of lower mortgage rates, a bouncing equity market and the rising impact of government policies to support home buyers confidence. This may be sufficient news to hold the anticipated pullback off for another day.
High-quality growth stocks appear to be taking the lead. Many healthcare stocks that have missed much of the rally during the past eight weeks appear to be coming back into favor. Names like Becton, Dickinson and Company (BDX), Zimmer Holdings (ZMH) and Stericycle (SRCL) all fit this bill.
There has also been good relative strength in the past week in the consumer staple, telecom and utility sectors.
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What the Markets Are Saying
The clear theme that seems to be developing is continued economic weakness in the United States and Europe in the near term. But, so far, global growth looks good — consider that India’s stock market is up 17% today … WOW!
Are certain risk assets looking through the near-term economic weakness? Is gold? From an economic perspective, the dry bulk index and appreciation lately seems to support this view. It seems like credit markets, gold and the CBOE Volatility Index (VIX) are looking through the near-term economic weakness.
This morning, the Financial Accounting Standards Board (FASB) will discuss the effective date and transition of the long awaited changes to off-balance sheet accounting. We expect the five-person FASB board to reaffirm a Jan. 1, 2010, effective date for these changes as recommended by the FASB staff.
Assuming the accounting changes are finalized, they will materially impact the balance sheets and income statements of credit card companies, large-cap banks and smaller finance subsidiaries. The proposed changes, if finalized in their current form, would increase leverage levels (assets/equity), possibly reduce earnings from less front-end loading of income and, depending on regulators’ views, possibly raise capital requirements.
Today’s Trading Landscape
Today, we will hear earnings reports from Autozone, Hastings Entertainment, Integrated Electrical, Ituran Location and Control, Perfect World, Dr. Reddy’s, Spectrum Pharmaceuticals, Tsakos Energy, Valspar Corp, AirMedia Group, American Apparel, Himax Technologies, Simcere Pharamceutical and Lowe’s Co.
We will also hear the NAHB Housing Market Index for May; the consensus estimate is 16.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
