Last week was the worst week for the market so far in 2012, and I want to take a moment to dig a bit deeper into the reasons behind the pullback. What happened was that investors got worried about Europe and went out to sell, and fund managers got hit with redemptions.
So what we’re seeing is the hangover effect as institutions are catching up with negative sentiment. First, fund managers sold their weaker stocks, and now they have to “throw the baby out with the bathwater” and exit their stronger positions to pay out clients.
We call this the capitulation period, and it’s happening right now in the market.
This is why the market wasn’t buoyed as much as expected by the Facebook (NASDAQ:FB) IPO excitement. Typically, a $104 billion IPO is enough to get investors in the buying mood and send the broad market higher. But while investors were in a Facebook frenzy — 300 million shares traded in the first couple hours after FB stock hit the market — it couldn’t counteract the institutional redemption selling.
So where does that leave us? Well, it takes time for redemptions to catch up, and the silver lining here is that anytime you have a capitulation, you have a rebound. Right now, the market is grossly oversold, and I expect an imminent bounce.
And those stocks with superior fundamentals will be the first to swing back. For example, many of our Quantum Growth stocks posted sharp pullbacks — especially some of our strongest-performing recent stocks, like Liquidity Services (NASDAQ:LQDT), Sturm Ruger & Co. (NYSE:RGR) and Tucows (AMEX:TCX). These stocks were all up significantly in the last few weeks, and the sharp pullback represents a rare second chance to get in before their next leg higher. I think that these three stocks have the best near-term bounce potential and nimble traders should get in at current prices.
While there are a lot of distractions today, that doesn’t mean that we can ignore what’s happening in Europe. Right now, the most important fact to take away from the latest news in Europe is that the euro continues to decay as the dollar strengthens. The weaker euro will help the eurozone boost its exports and possibly avoid a recession — especially with Germany and France, the two largest E.U. members, posting 2% and flat GDP growth, respectively.
This is another way that the chaos in Europe is actually good for our domestic Quantum Growth plays on the U.S. consumer. As the dollar rallies, we see downward pressure on commodities and multinationals. Oil goes down. Food prices go down. What this does is put more money in consumers’ pockets — and no surprise that retail sales remain strong and inflation is fizzling. The Labor Department reported last week that CPI remained unchanged in April, which gives the Fed extra room to maintain its 0% interest rate policy as inflation cools.
Plus, the U.S. economy is still growing. The Fed reported that Industrial Production rose 1.1% in April — the strongest monthly gain in about a year and a half. This soundly beat economist expectations for 0.7% growth, as virtually all sectors reported strong gains.
On the whole, I remain very encouraged going forward into the summer months.