Stocks have traded quietly this week as the dollar rises, commodity prices fall, small-caps and retail stocks advance and the potential start of World War III is ignored.
Just another crazy set of summer sessions on Wall Street.
The push higher in the dollar is the main event, as it catalyzes many of the other trends. When the dollar rises, commodity values fall—and that leads to investors feeling more cheery about the prospect of consumers spending more at retail.
It also makes more liquidity available, and that feeds directly into the market’s newfound desire to take on the risk of owning small-caps. The only trouble at this juncture is that the buck is rising because of heightened tensions over the Russia-Georgia conflict and fears of deepening recession in Europe rather than as a truly positive vote on the U.S. economy.
The difference between the returns of small-caps and large-caps lately has been dramatic.
On Monday, for example, the big-company stocks in the Dow Jones Industrials Average ($INDU) rose 0.4% as a group. Meanwhile, the S&P 600 Smallcap Index ($SML) rose 2.3%. That’s a gigantic difference.
You can see the difference in the year-to-date numbers most dramatically.
The Dow is down 11.2% this year, while the Smallcap 600 is actually only down half a percentage point, and the S&P Midcap 400 ($MID) is down 4%.
The real standouts this week have been the retailers, whose exchange-traded fund (RTH) rose a whopping 3.2% on Monday alone. It’s a little hard to believe, but the RTH is now up 4.8% for the year.
It’s amazing what a change in the direction of oil prices will do for faddish apparel stores like Aeropostale (ARO) and Urban Outfitters (URBN), so long as they do a good job of figuring out what teenagers want to wear in any given season.
If you want to see what happens when a retailer’s merchandise team goes astray, just check out the devastation in one-time super-stocks Chico’s (CHS), Abercrombie & Fitch (ANF) and American Eagle (AEOS), all of which are heavily out of fashion with declines of 30% or more this year.
Meanwhile, the decline of commodities and the advance of the dollar are having a crippling effect on many foreign stock markets.
Brazil’s stock market, captured by the exchange-traded fund EWZ, was down another 4% this week, and is now down 10.7% for the year after having been up as much as 22.5%.
South Africa’s ETF (EZA) was down 1.5% today to sink to a 19% year-to-date deficit on the heels of more crushing blows to gold.
Financials Teetering
Back here in the states, I’m sure you have noted that financial services companies have been on the move lately after bottoming in mid-July.
The Financials Select SPDR (XLF) gained 1.7% Monday but fell 2% Tuesday and is now merely down 23% for the year.
One of the mildly interesting facts about the XLF now is that the companies that have seen their stocks crushed the most, such as Fannie Mae (FNM) and Freddie Mac (FRE) are no longer big enough to hurt the index much when they sink. FNM used to really matter to the XLF, and now when it sinks 28% in three days, as it has since last week, it doesn’t move the XLF dial.
In my newsletter Trader’s Advantage, we’ve been short FNM common stock and long FNM puts for a week, and are showing profits of 30% and 58%, respectively.
Wells Fargo (WFC) and Bank of America (BAC), the old retail banking powerhouses, have been the leaders in the advance out of the July low, while investment banks like Lehman Brothers (LEH) and Goldman Sachs (GS) are still pretty dreary.
Veteran banking analyst Richard X. Bove slashed his estimates on Goldman on Monday, stating that he thinks consensus estimates are way too high and must be cut significantly. He notes that key sources of revenue like investment banking, securitization, mergers, private equity and trading commissions are all down heavily and unlikely to revive soon. He thinks it will emerge from the current mess as one of the strongest financial institutions in the world but wouldn’t touch it above $155, which is $27 below the current $178 quote.
It’s great to see the financials improve now because it is giving people a chance to get out of them at higher prices than we saw a month ago.
I still think they’re going to face a difficult fall and winter and would continue to steer clear for now. A big test of the Financials SPDR will come at around the $23.50 to $24 level, which is 10% higher than the current quote. I seriously doubt it will get through there—the 100-day average, which has contained all rallies in the past year—on the first try.
If repulsed hard, consider buying the UltraShort Financials (SKF), as I think the XLF will likely skitter back toward its July low sometime in the fall.
Jon Markman is editor of Trader’s Advantage and a regular contributor to InvestorPlace.com. To get this type of actionable insight from Jon and other InvestorPlace Media experts go to www.InvestorPlace.com today!
