The broader market lumbered to a clumsy close Monday following a session of directionless, low volume trading. Stocks were initially on their back foot after the release of ISM manufacturing data that showed a big miss from expectations. But an hour later, the organization that publishes the data announced it had made an error with seasonal adjustments, and the numbers were actually just a hair above in line. An hour after that came another announcement that the first adjustment was wrong, too, and in fact, manufacturing was actually right in line with expectations.
Once markets digested that set of non-news news, the indices flattened out and remained subdued the rest of the day.
The one actual news item of note came out of China, where the official manufacturing Purchasing Managers Index was slightly better than expected, rising to 50.8 in May, with forecasts for 50.7. April’s figure was 50.4. The details showed that new orders rose to the highest reading since November, while production and new export orders were also higher. The index has now risen for three straight months, easing some early-year concerns of a sharp slowdown, while possibly indicating that the government’s fine-tuning policies are gaining traction.
The data seemed to provide a tailwind for machinery stocks, with Joy Global (JOY) up 1.9% and Caterpillar (CAT) up 1.5%. Some industrial metals names also outperformed, notably aluminum producers Alcoa (AA) and Century Aluminum (CENX), up 1.6% and 2.2% respectively. The latter two were helped by BofA Merrill Lynch upgrades.
Techs were among the worst performers following up on big stumbles by software-as-a-service companies last week. The whole concept of cloud-based software services is coming under attack, with ex-leaders like Splunk (SPLK), Workday (WDAY) and FireEye (FEYE) being spanked.
On the economic front, first-quarter GDP revisions showed that the economy actually shrank in the first quarter. Bears were rubbing their hands, expecting a sell-off — but none came. Why?
Largely, it’s because investors recognize things have a way of averaging out, and if you take a deep breath and look past the quarter-to-quarter volatility, you can see that the U.S. economy most likely will return to a trend growth rate of about 2.5% for the remainder of the year.
That might not sound like much to investors who were accustomed to “trend growth” of 4% in the 1990s, but it’s actually awesome. Veteran, old-school hedge fund manager Craig Drill commented in a note to clients Monday that this moderate rate of growth “may be the sweet spot for equity markets.” The reason: “It is fast enough to keep corporate earnings growing, but slow enough not to scare the Federal Reserve or to embolden bond market vigilantes.”
At present, he notes, U.S. stocks are valued at a forward price/earnings ratio of 16 times, not much above historical averages and well below the valuation levels at previous peaks. Cash is being returned to investors via dividends/share buybacks net of share issuance/merger and acquisition activity, with second quarter volume on a pace to more than double 2013 levels.
After a 20% expansion in the price/earnings ratio in 2013, with fear subsiding, Drill observes, “The stock market is entitled to some choppy action and rotation.”
Since the market has been mostly flat this year, with modest excursions higher, bears have argued that the bull cycle has peaked. But this is unlikely to be the case. Drill, who has been through many more cycles than the average investor, concludes: “Lest we forget, bull markets do not die of old age. They fall victim to an inverted yield curve, a recession, or a sharp drop in corporate profits. None of these are on the horizon.”
I agree with Drill’s assessment, and my bullish recommendations show it. I’ve got one of the most popular tech stocks for you today that’s proven to be a forerunner in this market.
Facebook (FB) has consolidated over the past two months after a nasty slide from its March high. It is still very expensive, but it is a market leader, and as such it will be bought regardless of valuation as an expression of optimism.
Shares slipped as much as 1.5% midday Monday but rebounded to close at their high, down just 0.3%. They should be heading much higher soon. Open positions at $63.10 or less.
Once your orders are filled, set up to sell half of the position at initial target of $70.00. Use a stop-loss to exit if FB trades below $59, good after 11:00 a.m. ET only to avoid the early market volatility.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
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