One of the most interesting events we’ve seen recently was European equities finishing mostly higher on Thursday despite a serious downgrade of Spanish debt by credit analysts at Standard & Poor’s to one level above junk. That is pretty nasty! The agency expressed concerns about the eurozone’s ability to deliver a cohesive policy response, noting the recent pushback against efforts to sever the link between banks’ debts and sovereign debt.
In typical “bad news is good news” fashion, the downgrade was quickly spun as a potential positive, given that it could further ramp up the pressure on the Rajoy government in Spain to make an official intervention request.
This allowed stocks to actually start off on a bright note Thursday morning in the midst of a week-long decline — but ultimately, most of the marquee indexes closed flat or lower by the end of the session, and kept on the same downward trajectory through Friday.
What’s troubling about this is that the losses mostly resulted from some more unexpected events — and as traders, we obviously want to be a step ahead of the game, not taken by surprise. For example, the market seemed to have been thrown for a loop in the aftermath of the latest initial claims for jobless benefits. Bottom line was: The number that was celebrated at the start of the day ended up being ridiculed due to concerns over the accuracy of the positive figures.
Another of the more unusual events was a flurry of merger news. I say this is unusual because normally when credit markets are in gear, as they are now, at least a couple of major M&A deals get announced each week — and yet lately we’ve seen very few.
Well, this one involved a rumored investment by Japanese venture group Softbank taking a controlling stake in Sprint (NYSE:S). The rumors were then confirmed on Monday. The target company’s shares rose briskly on Thursday, as did Clearwire (NASDAQ:CLWR), whose fortunes are tied to Sprint. However, the rest of telecom, most specifically AT&T (NYSE:T), fell dramatically the same day on expectations that Apple (NASDAQ:AAPL) iPhone revenues will be down.
Overall, the markets are not acting much like a normal October, a time when there is usually swelling strength in technology and retailer stocks that crescendos with earnings reports that are better than expected. This time, tech is soft — and every time a major company announces earnings, the news is actually worse than expected.
Recently, Morgan Stanley analysts made an interesting point that trading has been very choppy in the past two months unless a central bank speaks or acts. They pointed to the fact that the bulk of the previous rally came on only a handful of days: +22 in the S&P 500 on ECB chief Mario Draghi’s July 26 “bumblebee” remark; +26 points on the July 27 bumblebee follow-through; +26 points on the Aug. 3 delayed reaction to ECB meeting; +29 points after the Sept. 6 ECB meeting; and +23 points after the Sept. 13 Fed meeting.
Given all of this, the markets may well continue to be choppy through the fourth quarter as earnings and economic woes surface, but it should have an underlying bias to the upside provided by the belief that central bankers are on the case and fully intend to inflate risky assets higher.
To take advantage of the short-term choppiness, my research suggests one of the best areas right now is consumer staples. A chart that’s looking particularly good to me at the moment is Diageo ().
It’s one of the largest makers of alcoholic spirits in the world and has been one of the strongest stocks in Europe all year. If stocks come under pressure, DEO is likely to come back to its 100-day average as it did in May. On the other hand, if world markets stabilize, DEO will be among the first to move higher.
Right now it could go either way, so just put this on your radar for the moment until there’s a clearer sign of whether to swing bullish or bearish.