On Wednesday the markets sold off on FOMC Chair Janet Yellen’s remarks. On Thursday the broad market, as defined by the S&P 500 (SPX) and Dow Jones Industrials (DJI) recouped those losses. The mistake, which the bears seem destined to repeat, is extrapolating a one or few day sell-off into a major correction or bear market. It happened this week and last week and will certainly occur again.
Focus on Investment Related Weather Patterns
Late first quarter earnings reports continue to trickle in with the same theme bring repeated – the impact of winter weather. As I mentioned the other day, there will be a pattern which will play out over the next few months: disappointing 1st quarter results accompanied by 2nd quarter downward guidance topped off by better than expected 2nd quarter earnings. This will play out from now through the end of July.
In anticipation of that weather patterned earnings news flow, it may make sense to begin to scale back on exposure as the current quarter comes to an end. There is one important distinction that needs to be made. Cutting back on stocks that might have weather impacted 1st quarter earnings is one thing. However, there are many companies or sectors that do not have weather related operational issues for which you can add to. Technology, healthcare and financial services immediately come to mind. Thus, you can either play it safe and hold some cash or reallocate sales proceeds into other sectors.
Mid-term Election Year Patterns Are Also Worth Noting
Be cognizant of the fact that during mid-term election years, on average, 2nd quarters tend to produce negative returns and 3rd quarters tend to be flat. This must be incorporated into your tactical decision making for your portfolio over the next six months
Expect Markets to Push Higher Into Early April
In the short term, I still believe the market will make a run such that the S&P 500 pushes through the 1,900 level. This could take place in the next week or early April. What we will need is for the small and midcaps to grab investor attention as those indexes did not fully recoup Wednesday’s losses on Thursday. Today’s market open appears to be a positive one. Recently though, the markets have pulled back by the close of business on Friday in fear of what may take place in Crimea and Ukraine. If we could break that pattern, the markets will have a nice follow through to yesterday’s gains. If not, we will be back to teeter-totter mode. It is hard to say given the tit for tat sanctions that Presidents Obama and Putin keep issuing against one another’s nations.
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Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC had no positions in stocks mentioned — although positions can change at any time.
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