Last week was another lousy one for global stock markets. The Dow Jones Industrial average was down 3.28%. The S&P 500 fell 3.23% and the NASDAQ dropped 3.24%. The Dow is now flat for the year and is down 8.7% from the multiyear high of 13,279.32 hit May 1. The Standard & Poor’s 500-stock index is now off 9.9% from its multiyear high.
Nor is this week off to a better start. Asian markets were sharply down this morning. Hong Kong’s Hang Seng Index dropped 2.3%, eliminating all of its 2012 gains. The strengthening yen continued to put pressure on Japanese exporters, pushing the Japanese market to a 28-year low!
So the bounce I anticipated from sharply oversold U.S markets happened — but did not hold. With the S&P 500 dropping both below its 200-day moving average and its previous technical resistance point of 1,295, I am recommending that you close your position in the ProShares Ultra S&P500 (SSO) at a loss.
The current market sell-off seems like a reprise of 2010 and 2011, with financial markets heading toward summer in a panic. The plot is also eerily familiar. Greece may be forced to exit the euro zone. The Spanish banking system is under pressure. This time around, the United States contributed to the negative sentiment as well. U.S. manufacturing cooled in May. There was the third consecutive month of disappointing payroll gains. And U.S. GDP growth in the first quarter was revised down to a 1.9% annualized rate.
So we are enduring the most extreme negative sentiment in the markets since last August. The good news is that such extremes have almost always led to a bounce.
According to sentimentrader.com, since 1950, there have been 12 occurrences that the S&P 500 violated its long-term, 200-day moving average on such as steep of a drop on Friday. Three months later, the S&P was positive 10 of those times. The exceptions were the crash in 1987 and a tiny loss in August 2011.
The bottom line? So the current sell-off could turn into a once-in-a-decade kind of rout. But odds are that we will recover from this bout of market weakness just fine.
But until then, it’s best to stick to your stops and pull in your horns.
Portfolio Update
Bank of Ireland (IRE) lost 2.55% last week. Despite the tremendous negativity in the markets last week, IRE incurred a surprisingly small loss. Bank of Ireland is in a better position compared to last year, having repaid all of the emergency liquidity assistance (ELA) that it needed to survive during the height of the crisis. IRE is a HOLD.
National Bank of Greece SA (NBG) dropped 17.33% over the past five trading days. Greece’s four major banks, NBG included, are solvent once again due to a recent 18 billion euro cash injection. However, NBG reported a Q1 net loss on Thursday sending shares lower on heavy volume. NBG is a HOLD.
Monster Beverage Corp. (MNST) lost 3.30%. Although MNST dipped slightly last week, it still managed to hold the 20-day moving average. SunTrust also upgraded MNST to a “Buy” last Tuesday and set a $90 price target. This is 27.65% above Friday’s closing price. MNST is a BUY.
Novo Nordisk A/S (NVO) fell 6.52% last week. NVO had a tough week, selling off on unusually heavy volume as broader markets pulled back across the board. However, the bullish case for NVO remains intact. Technical indicators show NVO is vastly oversold and I expect an aggressive snap-back rally when the current market correction abates. NVO is a HOLD.
3D Systems Corp. (DDD) lost 4.97%. DDD is in the same boat as NVO — a great stock that is getting cheaper for reasons that have nothing to do with its fundamentals. DDD and its main competitor Stratasys (SSYS) both trade at premium valuations. However, after last week’s across-the-board markdown — DDD is now a cheaper buy. DDD is a BUY.
Liquidity Services, Inc. (LQDT) lost 4.28% last week. LQDT is up 206% for the previous year and currently has a long-term earnings per share growth estimate of 29.7%. With a return on equity of 21.9%, this undercover “Internet darling” is beating most of its bigger online competitors. LQDT is a BUY.