Start Preparing Your Summer Trading Plan

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Stocks fell Thursday, obliterating most of the month’s gains, but still closing up slightly for April. Tech and biotech stocks, as well as some high-P/E small caps, led the way lower.

Apple Inc. (NASDAQ:AAPL) fell 2.7%, and the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) lost 3.2%. Industrial stocks were down as well, with the Industrial Select Sector SPDR ETF (NYSEARCA:XLI) off 0.9%. The small-cap Russell 2000 fell 2.2%.

The bellwether of future economic growth, the Dow Jones Transportation Average, gave up 1.3% on Thursday and ended April down 1.7%.

In after-hours trading, LinkedIn Corp (NYSE:LNKD) fell more than 20% after a revenue miss and lowered forecast caught investors by surprise.

Also behind Thursday’s sell-off were several economic reports that put into question the high P/E multiples of some equities.

Weekly jobless claims fell sharply, and consumer spending was lower than expected, coming in at 0.4% versus an estimate of 0.5%. Consumers appear to be building up their savings, despite the encouragements to shop such as lower gasoline prices and discounting. Personal income for March was flat while analysts’ had expected a slight gain of 0.2%.

Crude oil rose 1.8% to $59.63 barrel. Gold futures fell 2.3%, closing at $1,182.40 an ounce. The benchmark 10-year Treasury note’s yield rose to 2.05% as bond prices fell.

At Thursday’s close, the Dow Jones Industrial Average was down 195 points at 17,841, the S&P 500 fell 21 points to 2,086, the Nasdaq was off 82 points at 4,941, and the Russell 2000 dropped 27 points to 1,220.

The NYSE’s primary market traded 1.1 billion shares with total volume of 4.4 billion. The Nasdaq crossed 2.2 billion shares. On the Big Board, decliners outpaced advancers by 3.2-to-1, and on the Nasdaq, decliners led by the same ratio.

UUP Chart
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Chart Key

One of the most significant charts of the week shows the pummeling and breakdown of the U.S. dollar. PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) tracks an index that represents the dollar relative to a basket of foreign currencies.

The buck dropped for the sixth straight day and has been on a steady decline throughout the month of April, reflecting U.S. economic weakness.

S&P 500 Chart
Click to Enlarge

Despite near-term weakness, the bull is still alive and strong. The S&P 500 posted a slight advance for the month of April.

The chart I feature monthly highlights the 17-month moving average of the S&P 500. It has called two tops and two bottoms since 1997. Those who have relied on this simple method of guidance for their long-term holdings have done very well when compared with a straight buy-and-hold strategy.

Conclusion

Thursday’s rout highlights the danger of holding high-P/E stocks indefinitely and has little to do with the long-term trend illustrated by the 17-month moving average of the S&P 500. The S&P 500 is currently selling at an average P/E of about 18 times 2015 estimated earnings. Historically, this is a modest ratio.

However, as pointed out by Deutsche Bank’s chief U.S. equity strategist, an 8% adjustment should be expected this summer, and probably sooner than later. He suggested that the dollar will strengthen and is underweighting commitments in energy and industrials, and taking a more defensive posture by buying telecom, utility, health care and big-cap technology stocks.

His outlook pretty much mirrors my own, and I plan to focus on these sectors in the Trade of the Day this month, starting with a utility stock.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2015/05/daily-market-outlook-start-preparing-summer-trading-plan/.

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