Very Difficult to Crush This Market

 | Mar 20, 2014 | 1:49 PM EDT
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Can a market that is being led by the two largest sectors in the Standard & Poor's 500 possibly falter? As I watch the action among equities, I am struck by how strong the financial and technology stocks are. These are the two most vital groups to any advance, because they are classic leaders. There are so many financial institutions out there, and so many companies involved in semiconductors, communications and big data -- true hardware -- that it's really difficult to crush the entire stock market with that kind of participation.

Sometimes you have to examine a stock market as if it comprises a series of neighborhoods. Right now the Philadelphia Semiconductor Index (SOX) and the Financial Select Sector SPDR Fund (XLF), which define the winners today, are fantastic neighborhoods -- and one of the chief characteristics of great neighborhoods is that a bad house within them will be better than the best in many others.

Consider the fate of two stocks that seemed pretty hopeless before the Federal Reserve announcement Wednesday, which some interpreted as pointing to the relatively imminent end of bond-buying and a rapid turn to interest-rate-raising, perhaps as early as this time next year. Of course, I am using the most negative interpretation of what was really said yesterday, but we do tend to go to extremes when it comes to the Fed.

Let's take the cases of Citigroup (C) and Intel (INTC).

We know that Citigroup has had the single most negative backdrop of any of the money-center banks. While it still has substantial operations in the U.S., it has become synonymous with emerging markets, especially Mexico, where it has been hit with a relatively egregious scandal. It is the bank that I believe has the least likely chance to return capital to its shareholders, and whose execs will not be able to return capital, neither in the form of an increased dividend nor via a meaningful share buyback.

Citi stock still had a gigantic run off of real bad assets, courtesy a team of bankers long gone who seem to have had a rendezvous with defaulting destiny. It is, in short, a nasty gut-renovation house that would have been a teardown if things hadn't gotten better.

What's Citi doing right now? It's rallying, and rallying as if it is terrific regional bank that's going to have a sizable boost in its net interest margin because of higher rates that, of course, will allow it to make more money on your deposits -- even though Citigroup has many deposits overseas that simply aren't impacted by the Fed at all. That's a classic sign of a very strong group that's being led higher by its nose because of its uniformity, caught in a move driven by a very powerful set of ETFs that homogenize the group. This is something I rail against in Get Rich Carefully, but it's nothing more than spitting in the wind.

Then there's Intel. The only thing that's happened so far with Intel this year has been an endless number of guidance cuts as its new CEO, Brian Krzanich, deals with a company that has been caught even more flatfooted than Microsoft (MSFT) when it comes to mobile-vs.-desktop. Intel's only savior has been its dividend yield, and we are experiencing a day when yield is not of help. The Fed's statements have made it so that bond-yield equivalents like Intel -- and that is, indeed, what it has become with a 3.5% yield -- are no longer "right" for many portfolio managers.

So it's got number cuts and less important yield support -- which would indicate a stock that's going down, not up, after the Fed's statements. Nope, it is enjoying one of the best rallies it has had in ages, and that's because the Philly Semiconductor Index has broken out.

That's another fixer-upper that's doing better than most darlings in other less stellar groups.

There's other good news here. Many have been concerned about two things in this market -- heightened valuations and froth. It is absolutely true that, when you have multiple stocks valued on sales and not earnings, you are in a "tread-carefully" universe. The price-to-earnings ratio of the S&P is almost 17.5x, meaning the market is at its most expensive level since the bull market started. That's not good. However, neither the technology stocks nor the financials are expensive by any measurement. In fact, they are historically much closer to their rock-bottom valuations than they are to their sky-high ones.

I don't want to overlook the bubble portion of the market. For example, the froth indicators I follow are still flashing red, but certainly not with the intensity of previous days. I know that people who own certain stocks I regard as speculative would never want those stocks addressed in that fashion. However, we are seeing a steep decline in -- let's be polite -- "white chip" stocks?

The Plug Power (PLUG) fuel-cell melodrama has been turning tragic for a full week now. The stoner stocks, as represented by the bluest chip of a truly speculative lot, GW Pharma (GWPH), have wilted for the moment. The 3-D stocks are dealing with the double-whammy of vicious shortfall by ExOne (XONE), a key player in this complex, and the possible incursion by big dog Hewlett-Packard (HPQ) into the space.

Many have wondered when the world's largest printing company would move into the hottest part of the printing business. Even as Hewlett-Packard has become one of the better houses in the tech neighborhood, one whose shares have had a real stealth rally, I had begun to believe that it was like Intel and Microsoft -- that it just wasn't catching the equivalent of the mobile portion of the spectrum. I know that the adherents of these stocks, including Stratasys (SSYS) and 3D Systems (DDD), have already pronounced Hewlett-Packard as an extinct dinosaur, but I think that this could be a real T-rex comeback.

The only glaring signals that froth is alive and well lie in the always-feisty Tesla (TSLA) and in the plethora of cloud-based offerings, such as Q2 Holdings (QTWO). That's the software-as-a-service play for community banks that came public today to huge acclaim. There are so many of these cloud plays in the queue that you have to recognize that this has become froth-personified, especially when the established cloud plays such as Workday (WDAY) and (CRM) seem hopelessly mired in some sort of high-multiple quagmire. The disparity can't exist for long.

Tesla? I think this company could be banned from selling any cars and the stock could still go higher. It continues to defy rationality.

Now, there are many iffy ends of the market today. We have some good and some bad retailers, some ramping and some declining industrials, a mixed picture in the oils and negative transport and mineral action. What I am positing, though, is that when two inexpensive neighborhoods show signs of gentrification and those two neighborhoods are the biggest in the city of stocks, it's very difficult to bet against a turn, at least from the depths of yesterday's Fed fears.

To me the takeaway is simple again. Those who embraced the faux strategy of panic yesterday missed out on some obtainable gains, just as they have pretty much endlessly missed out since the beginning of the Fed obsession that, alas, I would argue isn't worth obsessing over anymore. You can keep an eye on the Fed, but if you keep both eyes on it you might as well accept that you aren't going to make as much money as those who have sworn off Fed addiction and are beginning to lead cleaner, more productive and more profitable lives.



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