by Jim Woods | March 31, 2014 8:43 am
The first three months of 2014 are nearly in the books, and so far it’s been a tale of volatility, news-driven trade and geopolitical worries.
Well, expect the same for Q2.
While most of the usual, over-exuberant bullish pundits on Wall Street kept saying the market would pick up right where it left off in 2013, the first month of the year turned out to be anything but a continuation of the party. January saw stocks experience one of their worst one-month performances in years, and that selling got even more intense in early February.
Yet as is usually the case with markets, the selling gave way to bargain hunters, and midway through February we saw stocks come roaring back. The result of that comeback sent equities in the benchmark S&P 500 to new all-time highs by early March, but things have plateaued since then, with the index on pace to finish fractionally different or even flat.
So … what happens next? Will stocks take their cue from January and fall back on their heels, or will another February-like push keep the markets soaring to new highs?
The following is a look at the potential catalysts and the drivers going forward that will help determine this market’s direction over the next several months. Investors looking to get a bead on the markets should keep a watchful eye on all of these topics:
One of the biggest risk factors facing a truly global market is the prospect of armed conflict in regions of the world where stability once reigned.
Now, it’s one thing to have ongoing conflict in hotspots such as Afghanistan, Iraq or Syria, where such outbursts are expected. But it’s another thing to have a new conflict erupt in the Ukraine, a nation ensconced near NATO borders.
The annexing of Crimea by Russia, and the potential for more incursions by the former Soviet Union into Ukraine and beyond, is something perched in the backs of nearly all global traders’ minds.
So far, the effect on the financial market from the Russian action has been relatively subdued, although risk assets such as gold — via the SPDR Gold Shares (GLD) — did experience a price spike as troops rolled into Crimea.
If tensions escalate from here, or if other nations such as Iran decide to gin up tensions in their sphere of influence, look for stocks to react violently in response.
This year we have a new Federal Reserve head in Janet Yellen, but what we’ve seen so far has been a continuation of the central bank’s “taper” of its current bond buying program.
On March 19, the Fed announced it would reduce its asset purchases by $10 billion per month to $55 billion. More importantly, the Fed dropped its previous threshold of a 6.5% unemployment rate as the trigger that would prompt the first interest rate hike in years.
During her first post-FOMC release press conference, Yellen had a bit of a slip of the tongue and suggested that interest rates would start to rise sometime around six months after the end of quantitative easing. That admission wasn’t all that surprising, but this realization did cause the yield on the 10-Year Treasury Note (TNX) to shoot higher.
The Fed meets again April 29-30, and what the FOMC decides to do regarding a further taper, what it writes in its accompanying statement and what, if any, slips of the tongue might come from Yellen puts the Fed front and center in Q2.
The first quarter saw a lot of volatility in markets, but there also was a lot of volatility in terms of the weather throughout much of the country. Extreme cold and snow storms throughout the Midwest and East Coast have been blamed for lackluster GDP growth, slower consumer spending and lukewarm job growth in 2014.
Thing is, while we’ve gotten various warnings, we have yet to really see how the weather has affected corporate bottom lines; however, beginning shortly, we’ll start to see how companies performed in Q1.
If we see retail bellwethers such as Walmart (WMT), Home Depot (HD) and others come in with strained numbers, it could be a major headwind for stocks going forward. Conversely, if retail sales and other metrics defy the weather, and if numbers come in better than expected in other key segments, it could be a very pleasant climate for stocks in Q2.
One of the first lessons I learned when trying to analyze the direction of markets was that you need to watch current market leadership closely. When that leadership falters, it could be the first sign of either 1) a new rotation in markets, or 2) the beginning of a marked decline.
This year, biotech stocks and the IPO market have been red-hot, but the recent action in each has been less than encouraging for the bulls.
Biotech stocks, as represented by the SPDR S&P Biotech ETF (XBI), were up more than 25% through the first two months of the year. However, over the past month, XBI has plummeted nearly 15%. This marked turnaround is something investors need to watch very carefully, as it could be the canary in the coal mine that snuffs out the bull’s oxygen.
On the IPO front, we now are starting to see distaste out there for high-profile names, the biggest of which was the disastrous trading debut of Candy Crush maker King Digital Entertainment (KING).
Most investors are familiar with the old adage, “Sell in May and go away.” Like a lot homespun wisdom, this one does have numerical merit — at least statistically speaking.
For instance, from my take a couple years ago:
“According to the Stock Traders Almanac, if you went long the market on Nov. 1, 1972, and spent 37 years selling all of your holdings on April 30, then re-buying on Nov. 1 and doing it all over again, you would have earned an average annual return of 7.4%. If you would have done the reverse — buy in May and sell in November — your return would be a paltry 0.4% over the same 37 years.”
Now, history doesn’t always repeat itself, and if you would have sold in May 2012 or May 2013, you would have lost out on a lot of market upside. Still, the sentiment (and the strategy) will likely be operating this May, especially given the volatile year we’ve had in 2014. So, if you start to see some big selling in May, you might want to reduce exposure and take the summer off.
As of this writing, Jim Woods was long GLD.
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