Hot August Market Hides Mixed Messages
by Louis Navellier
With
one more day left in August, the S&P has now risen six months in a
row, for a total 56% gain since the March 9 lows, including 13% in July
and August alone. But this super-strong summer rally has been on
relatively light volume, so the big test will come after Labor Day,
when trading volume normally rises dramatically. It is noteworthy that
the volume of cash on the sidelines is still higher than it was in the
historically-low market bottoms of 1982, 1990 and 2003: there is plenty
of cash to propel the stock market higher this fall, provided there are
buyers.
Normally, investors cringe this time of year, since
September and October are the worst months for the stock market,
historically. However, after Labor Day, the “avalanche of good news”
(due to easier year-over-year comparisons on economic news) should
begin, running through at least May of 2010. If that happens, Wall
Street and the news media will continue to celebrate these headlines
with rallies.
The bad news is that the stock market has gotten
pricey. Many low-quality financial stocks have soared, as I’ll show you
(in the next segment). In fact, the Russell 2000 Growth index now
trades at about 70 times forecasted earnings, so investors must be far
more selective in the next market surge. After all, if the stock market
can rally in August on light volume, September could be even stronger,
when trading volume has historically picked up.
In summary, I am bullish because of (1) the high volume of cash on the
sidelines now returning to the stock market, spurred by (2) easy
year-over-year comparisons for economic news, and (3) a dramatically
improving earnings environment due to easier year-over-year earnings
comparisons. In addition, we will see (4) an inevitable flight to
quality, due to excessive valuations for many low-quality stocks.
The Low-Quality Financial-Stock Rally “Smells” Wrong
The
August stock market rise is narrow and suspicious, on low volume, but
there has been incredibly high volume in five formerly-troubled
financial stocks (namely, AIG, Bank of America, Citigroup, Fannie Mae
and Freddie Mac), which accounted for approximately 40% of the NYSE’s
trading volume in August! As of Friday’s close, AIG, Fannie Mae and
Freddie Mac were up a whopping 282%, 252% and 287%, respectively, in
the first four weeks of August, almost 11 billion shares’ trading
volume last week alone!
Either these stocks are part of one of
the greatest short-squeezes in history or something funny is going on
among speculators – or perhaps some of both. Clearly, many day traders
have gravitated to lower-quality financial stocks, fueling incredible
gains (up over 250% in August) in three of these five financial stocks:
AUGUST GAINS (to August 28)
Freddie Mac +287.1%........Last week’s volume.....1,215,303,900
AIG +282.3%......................Last week’s volume........386,220,400
Fannie Mae +251.7%.........Last week's volume…...2,743,226,900
Citigroup +65.0%...............Last week's volume.....5,461,772,000
Bank America +21.6%.......Last week's volume.....1,177,962,900
In the case of mortgage giants Fannie Mae and Freddie Mac, the
consensus on Wall Street is that their common stock equity is virtually
worthless. So why did these “worthless” stocks triple on huge volume?
Clearly, day traders like to swing for the fences in low-priced stocks
of disputed value, regardless of their fundamental flaws. Even General
Motors’ stock is trading up, although GM warned shareholders that its
common stock was effectively worthless when in bankruptcy proceedings.
This is not a healthy trend.