After a brisk recovery from recent lows, the shorts appear to be in a box. The algorithms are already forecasting a rate hike at some point in the not-so-distant future. Fundamentals in the cyclicals have stabilized -- and even the most exposed of secular declines, Joy Global (JOY), has continued its tear. National Oilwell Varco (NOV) and John Deere (DE), all names highlighted as longs in recent weeks, have materially outperformed during this rally of relief and stabilization. The shorts, betting on a continuation of fundamental deterioration, are in a big ol' box.
The broadening continues. Trends like these can last a while, even if the overall indices stay in a trading range. It is amazing how many folks piled onto the soft patch in the markets in May. It was obvious, though, that despite the Fed's movement (or lack thereof) and discretionary consumer weakness, the market had a bid underneath it. And the rotations remain brisk and strong.
I've spent the last week or so visiting many companies, mostly cyclically exposed with some secular drivers underneath. The theme is the same, as it's been for a long time, frankly. Slow, meandering, directionless growth, with upward and downward skew, should continue to be the expectation.
A slight upward or downward move in revenue, and over-extrapolation of recent strong or weak trends, has been a fool's game. Take Fastenal (FAST), for example, whose stock traded off a little yesterday after it reported daily sales for May. Daily sales slowed to 1.1% in the period, vs. 5.3% last year. Conversely, FAST's daily sales were cheered when they reached 3.8% in April; but the stock was already at $50 at that time. Analysts covering the stock raised estimates to reflect the April trend, only to reduce estimates following the May result. It's reflective of the continued slow environment that should not be surprising to anyone, overall.
For those focused on fundamentals, the stabilization trade is the theme. But it seems to be for stocks that remain meaningfully below last year's highs. For those who feel compelled to infer that recent business trends are weakening or strengthening, find the laggards and buy them. Stocks like Fastenal have already recovered; we're going to need a brisk reacceleration for the stock to achieve all-time highs again.