The Riskiest Time of the Year for Stocks Is Also the Most Profitable
Next week starts the riskiest month of the year for investors. Stocks have historically performed worse in September — down about 1 percent on average over the past 60 years — than any other time of year, according to the Stock Trader's Almanac.
If that weren't concerning enough, investors have another reason to be on guard: A potential "tapering tantrum" in markets.
The next Federal Reserve policy meeting takes place Sept. 17-18, when the central bank will consider whether to start winding down its $85 billion-a-month bond-buying program known as quantitative easing (QE).
That tapering, a word made infamous by the Fed, has been making headlines since May, when Chairman Ben Bernanke first hinted policy makers might curtail QE depending on the economic outlook. Any mention of that word by Fed officials since then has resulted in turbulent trading for stocks, bonds, commodities and the dollar.
The consensus view is that the Fed will announce a slowdown in the pace of QE purchases at next month's meeting. But no matter what the Fed says, volatility is already on the rise and trends are beginning to shift beneath the surface of the market.
For instance, the S&P 500 Homebuilding Index, a sector I wrote about previously in Money and Markets, went from a top performer in the first quarter (up 13.5 percent) to the second-worst performer since July 1 (down 12.1 percent).
Another dramatic reversal of fortune, but in the opposite direction, is happening in metals and mining stocks. They declined 3.2 percent in the first quarter but have surged 14.1 percent since the end of June.
Investors should pay attention to these shifts in sector leadership, especially when they occur at turning points for the broader market, which may be the case now. That's because the correlation between movements of individual stocks, sectors and the market in general often change over time. Yesterday's winners can easily become tomorrow's losers, or vice versa. And being in the right stocks and sectors at the right time can make all the difference in performance.
What follows are some of the shifting trends to keep an eye on.
First, when I search for stocks and sectors with market-leadership potential, I like to start by screening for those that are undervalued and, perhaps, out of favor. Having both factors working in your favor is best.
Everyone likes to find a bargain. When shopping, the idea is to keep an eye out for high-quality merchandise when it goes on sale. Bargain seekers love sales but, on Wall Street, that logic often fails. When stocks "go on sale," investors run away, shunning the best bargains.
That's because bargains are usually accompanied by bad headlines, inducing pessimism and making it tough to pull the trigger, even for dedicated contrarian investors.
After a 13 percent rally this year, it's not easy to find bargains in the S&P 500. Stocks aren't wildly overvalued, but they're not dirt-cheap either. Still, pockets of value do exist, if you take a closer look at basic valuation metrics.
Take the metals and mining sector. Mining shares have suffered as gold has fallen 20 percent in 2013 while copper has tumbled 9 percent.
As a result, mining shares are trading at bargain values today: Less than book value and at a substantial discount relative to the S&P 500.
In fact, if the sector were to rise to only average valuation levels based on price-to-book, there would be 42 percent upside potential.
Still, simply identifying undervalued stocks and sectors alone isn't enough.
After all, undervalued and out-of-favor shares can stay that way a long time. In the same way, overvalued sectors can continue to move higher, becoming even more overpriced.
So the second important step in this process is to identify what appears to be a well-defined change of trend for the better. Sometimes sentiment can be a guide. When a sector is so out of favor that you see nothing but a steady flow of negative news, and everyone on CNBC says "sell," that can actually be a positive sign.
Sure enough, as seen in the graph above, big institutional investors have little exposure to commodities and materials stocks in their portfolios now, according to a recent global fund manager survey from Merrill Lynch. In other words, hedge fund managers and other big investors have already unloaded their basic material stocks — there's nobody left to sell.
That means if an unexpected positive catalyst emerges — perhaps a sharp rebound in gold and copper prices — a huge amount of money on the sidelines could rush back into this unloved and undervalued sector, pushing mining stocks much higher in the process.
In fact, the process may already be under way.
Since July 1, the S&P 500 has gained just 3.1 percent, while the S&P 500 Metals & Mining sector is up 14.1 percent. Even as the stock market is losing steam, mining shares are gaining momentum. Investors see bargains in these stocks and money is starting to flow back into the sector.
Once that correction is over, metals and mining shares could be one sector that emerges as a new market leader. For a sector that's on my watch list of potential buy candidates, please visitMoney and Markets' Facebook page. Please share that information with your friends and make sure to leave me a comment.
|< Prev||Next >|
Current Headlines - Finance
CEO exit seen perfect time for Singapore bourse to lose regulatory role
(Repeats item published late Friday, no changes to text) * Calls grow for new securities regulator * SGX's stock trading volumes fell 21 pct in 2014 * Stock market struggled after penny stock scandal By Anshuman Daga and Rachel Armstrong SINGAPORE, Feb 27 (Reuters) - Singapore Exchange Ltd (SGX) may have just begun its search for a new CEO but investors and brokers already know what change they want to see: the bourse stripped of its regulatory powers and a rebuilding of its stock market business. Unlike other major financial markets, Singapore does not have a dedicated securities watchdog. Instead SGX is the front-line regulator and is in turn regulated by the central bank, the Monetary Authority of Singapore.
U.S.-Israel ties fraying over Netanyahu's planned Iran speech
By Matt Spetalnick and Dan Williams WASHINGTON/JERUSALEM (Reuters) - The United States and Israel showed signs of seeking to defuse tensions on Sunday ahead of a speech in Washington by Israeli leader Benjamin Netanyahu when he will warn against a possible nuclear deal with Iran. Policy differences over the negotiations with Iran remained firm, however, as Netanyahu set off for the United States to deliver the speech, which has imperilled ties between the two allies. Israel fears that U.S. President Barack Obama's Iran diplomacy, with an end-of-March deadline for a framework accord, will allow its arch foe to develop atomic weapons -- something Tehran denies seeking.
Funeral set for four Missouri shooting victims as probe continues
By Kevin Murphy KANSAS CITY, Mo. (Reuters) - Funeral services for four of seven people slain last week in a small town in Missouri are scheduled for Thursday as authorities seek a motive in the killings. The four are members of a family killed in the shootings on Thursday in Tyrone, Missouri. Their funeral will take place at the First General Baptist Church in Willow Springs, Missouri, according to the Elliott-Gentry-Carder Funeral Home.
U.S. astronauts speed through spacewalk
Two US astronauts on Sunday made speedy work of their third spacewalk to get the International Space Station ready for the arrival of more commercial spacecraft in the coming years. Tethered to the outside of the orbiting outpost, space station commander Barry Wilmore and flight engineer Terry Virts reported no problems with their spacesuits during the outing, but Virts discovered a small amount of water building up in his helmet after he re-entered the space station. A similar problem occurred after Wednesday's spacewalk, when about three inches of water collected in Virts' headpiece, but NASA said the problem did not put the astronauts in danger.
NYT: U.S. moving to deport Bosnians tied to war crimes
The United States is moving to deport at least 150 Bosnians suspected of taking part in war crimes and ethnic cleansing in the former Yugoslavia in the 1990s, the New York Times reported Saturday. The report said US immigration officials had identified about 300 immigrants believed to have concealed their involvement in wartime atrocities, but the number could eventually top 600. More than 100,000 people were killed in the 1992-95 Bosnian war which followed the breakup of the former Yugoslavia. "As long as we are alive, war criminals will never be in peace.
'I am not afraid': Russians march in memory of murdered Putin critic
By Polina Devitt and Maxim Rodionov MOSCOW (Reuters) - Tens of thousands of Russians marched through central Moscow on Sunday, carrying banners declaring "I am not afraid" and chanting "Russia without Putin" in memory of murdered Kremlin critic Boris Nemtsov. Families, the old and young walked slowly, with many holding portraits of the opposition politician and former deputy prime minister who was shot dead while walking home from a nearby restaurant on Friday night. His supporters have blamed the authorities. "If we can stop the campaign of hate that's being directed at the opposition, then we have a chance to change Russia.
Jobs report may test market's complacency
The U.S. stock market has been quiet this week - too quiet. Wall Street has traded in a tight range of late, with both volatility and trading volumes drying up as the earnings season winds down and Federal Reserve Chair Janet Yellen's recent Congressional testimony delivered no surprises. About 238,000 jobs are expected to have been added in February, according to the non-farm payroll report that will be released on Friday, down from the 257,000 added in January. "Economic data will be the biggest driver of market moves over the next month, and the key one is the jobs report," said Jim McDonald, chief investment strategist at Chicago-based Northern Trust Asset Management.
J.C. Penney and Gap are big market movers
Stocks that moved substantially or traded heavily Friday on the New York Stock Exchange and the Nasdaq Stock Market: NYSE J.C. Penney Co., down 62 cents to $8.50 The department store operator reported ...
Wall Street ends down after data; posts strong gains for month
NEW YORK (Reuters) - The S&P 500 posted its best monthly gain since October 2011 on Friday, but U.S. stocks ended lower for the day as U.S. economic growth slowed more sharply than initially thought in the fourth quarter.
TSX steady as miners, banks edge higher
By John Tilak TORONTO (Reuters) - Canada's main stock index closed little changed on Friday as higher bullion prices boosted shares of gold miners, while banks climbed after reporting quarterly results earlier this week. The bank results helped calm investor fears about the impact a sluggish economy and the oil-price slump are having on financial institutions. The Toronto stock market's benchmark index recorded at 3.8 percent gain this month, lifted by a rebound in its energy and financial sectors. ...