Leaders Lose Benefit of the Doubt

09/30/2011 10:30 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The market’s most popular stocks are starting to roll over on fresh signs that economic malaise is spreading, writes MoneyShow.com senior editor Igor Greenwald.

Shortly after the market opened on Thursday, with the Dow up 250 points and the Nasdaq gamely trying to keep up, I was reading Kevin Marder’s column on MarketWatch. He was writing about the Nasdaq’s failure to sustain a relief rally a day earlier, despite its relatively healthy technicals.

Marder’s takeaway is worth quoting: The market’s strongest major average had been “given the ball and was shoved back ten yards behind the line of scrimmage. At this rate, it would only be a matter of time before the growth stock leaders break down en masse, as some are already beginning to do.”

As it turned out, that time was measured in minutes. By midday, many of the Nasdaq’s favorite and most expensive growth names had been unceremoniously tossed into the dumpster, short-circuiting the other averages as well.

And while a late-day bounce prettied thing up a bit, it hardly repaired the charts of the likes of Baidu (BIDU), Wynn Resorts (WYNN), or Netflix (NFLX).

Netflix, of course, has well-publicized troubles with its business, while Baidu and other Chinese ADRs were blindsided when the head of enforcement for the Securities and Exchanges Commission told Reuters that the Justice Department is probing Chinese accounting irregularities.

But Wynn is neither a Chinese company nor a struggling one. Gaming revenue in Macau, the Asian outpost crucial to its future, was up 57% year-over-year in August.

Its problem, apparently, was the perceived slowdown in the Chinese economy. The Shanghai stock market is down 23% from April highs to a 14-month low, as Chinese officials continue to single out inflation as their top concern. Hong Kong stocks are down that much for this quarter alone, their worst performance in a decade.

The Chinese property bubble also seems to be popping, as overextended banks turn their backs on overleveraged developers.

But the Nasdaq’s problems run deeper than China. Green Mountain Coffee Roasters (GMCR) is hardly a household name in Shanghai, but was among the worst performers yesterday.

Even after that 7% drop, it sells at 58 times estimated earnings for the recently concluded fiscal year. The forward price-earnings ratio is a somewhat less-caffeinated 37. But to get there, Green Mountain would have to grow its profit 58%, and investors no longer trust that even companies with the strongest momentum can pull off such feats in this environment.

Ten days ago, I wrote about investors crowding the strongest growth stories as lesser stocks broke down and the economic environment darkened. Well, now those lifeboats are also taking on lots of water.

The day after Amazon.com (AMZN) unveiled a well-reviewed tablet, along with an operating system that will give it reams of valuable data about users’ online shopping and browsing, the stock gave up the entirety of its pop. Apple (AAPL) has been acting waterlogged as well.

There aren’t many safe harbors left, because investors are no longer counting on 2012 to maintain this year’s modest growth.

More proof that that the financial panic is translating into economic problems arrived this morning in the form of an unexpected sharp drop in German retail sales and a profit warning from Ingersoll-Rand (IR), which blamed a falloff in North American demand for its heating, ventilation, and air conditioning equipment and its security systems.

Ingersoll shares were down 13% in the early going, so it’s hard to argue that such disappointments are already baked into share prices.

The parallels to the fall of 2007 grow eerier by the day, as the economy’s struggles start translating into earnings disappointments. The difference is that in the intervening four years, the Federal Reserve has expended most of its ammunition, while the Treasury is much more heavily indebted and Congress looks paralyzed.

This is not the sort of an environment that’s going to attract a lot of bargain hunters at the lower end of the recent trading range. I expect stocks to break through that floor well before the politicians get their act together.

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