Mr. Market Won’t Be Rushed Into a Fall

by Richard Band | February 19, 2014 12:26 pm

Mr. Market Won’t Be Rushed Into a Fall

I guess I’ve said it before, but I’ll say it again:  You can’t hurry Mr. Market along.  In a long-term (“primary cycle”) sense, the benchmark U.S. stock indexes look very overextended on the upside.  We’re due for a more significant decline than we’ve had over the past two years.  However, that doesn’t mean Wall Street’s scruffy old man is ready to stumble out of the doorway just yet.

Too many indicators of the market’s internal health are still too strong for a major downturn to get rolling.  For example, the daily NYSE advance-decline line[1] (the cumulative total of advancing stocks, minus decliners) broke out to a new all-time high today.

It would be extremely rare for a primary top to form with the A/D line ascending fresh peaks.  At the final high for the marquee indexes (Dow, S&P 500, etc.), the A/D will most likely diverge and make a lower high.

So we’re left with our “road map,” which suggests that a really important top—the kind that might require us to take special defensive measures—probably won’t arrive until late April (at least).

Meanwhile, I’m carefully watching the flow of economic news.  Tuesday’s sharp drop in homebuilder confidence[2] adds one more data point to the case for a slowdown in business activity later in the year.

Granted, many of the weak numbers we’ve seen lately (industrial production, retail sales, jobless claims, purchasing managers’ sentiment) can be waved aside on account of the weather.  It’s possible, though, that these statistics represent the first signs of a more serious retrenchment down the road.  If so, the market’s technical evidence will, sooner or later, confirm the message from the economic releases.  But not yet!

For now, I continue to recommend that you keep accumulating great business franchises, gradually, at discounted prices.  Tuesday we got a nice chance to buy Coca-Cola (KO[3]) on an earnings-related pullback.

The Street wasn’t happy with Coke’s soft Q4 results[4], announced before Tuesday’s opening bell.  During the quarter, global case volume gained only 1% versus analyst expectations of 3%.  Earnings per share met the consensus for the quarter, but were up only 2% from the year-ago period on a comparable basis (stripping out one-time items).

Obviously, I’m not cheering these figures, either.  They’re mediocre by any standard.

However, CEO Muhtar Kent isn’t standing still.  He disclosed plans to cut $1 billion in costs by 2016.  Coca-Cola will pull out of the doldrums and sail ahead again, a pattern the company has repeated numerous times throughout its long history.

Don’t forget, too, that KO is rewarding you from Day #1 with a 3% dividend.  (I expect the payout to be sweetened shortly—an added bonus.)  I’ve been building my position in the stock on down days like today, and I encourage you to do the same.  Five years out, I believe KO will have outperformed the S&P 500 index by a wide margin, mainly because of the substantial valuation discount the stock is trading at right now.

Buy quality cheap.  It’s one of the few investment maxims you can count on to pay off, almost infallibly, over the long run.

P.S.  Another blue chip that took an earnings-related thump is Waste Management (WM[5]).  The nation’s largest trash hauler isn’t selling at quite as big a discount (relative to the stock’s own history) as KO.  However, this quasi-utility business would rate a buy on a further pullback.

 

Endnotes:
  1. daily NYSE advance-decline line: http://stockcharts.com/freecharts/gallery.html?$NYAD
  2. homebuilder confidence: http://www.marketwatch.com/story/home-builder-confidence-plunges-in-february-2014-02-18-10103496
  3. KO: http://profitableinvesting.investorplace.com/getaquote/?STOCK_VAR=KO
  4. soft Q4 results: http://investorplace.com/2014/02/ko-stock-dips-disappointing-coca-cola-sales/
  5. WM: http://profitableinvesting.investorplace.com/getaquote/?STOCK_VAR=WM

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