When Good News Is Not Enough

04/10/2014 12:00 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Today, despite the fact that initial claims for unemployment came in as good news, MoneyShow's Jim Jubak reviews why this news was not enough to stop the recent sell off in US stocks.

Even good news on initial claims for unemployment has not been able to turn a two-day rally in US stocks into a three-day rally. With technology and momentum stocks leading the way lower—again—the NASDAQ Composite index is down 2.47% as of 2:15 PM in New York. The Standard & Poor’s 500 stock index is lower by 1.43% and has now, again, fallen through support in the 1860-1858 range to test the next level at 1848-1847. The index was at 1845.53 as of 2:15 PM.

By this point in the momentum retreat, I think you should be able to put together a pretty accurate list of today’s downside leaders. Facebook (FB) down 4.29%. Google (GOOG) off 3.25%. LinkedIn (LNKD) a negative 3.78%. 3D Systems (DDD) down 8.47%. Amazon.com (AMZN) off 3.48%. Tesla (TSLA) lower by 4.02%. Twitter (TWTR) down 2.26%. The iShares NASDAQ Biotechnology ETF (IBB), a big leader lower recently on days when momentum stocks sell off, is down 5.34% today.

I see some evidence that the continuation of the retreat is making traders nervous. That’s showing up, in my opinion, in the extreme reaction to negative news from momentum leaders. In the formerly very hot network security software sector Imperva (IMPV) is down 44.8% today on a warning for the first quarter. In sympathy, FireEye (FEYE) is off 11.12% and Palo Alto Networks (PANW) has dropped 5.53%.

All this selling has ignored this morning’s good news on initial claims for unemployment. For the week ended April 5, new claims for unemployment fell by 32,000 to 300,000. That continues a recent pattern of an improving four-week moving average. Economists, surveyed by Briefing.com, had expected claims to come in at 325,000. The current four-week moving average is now down to 316,000 from 331,000 a month earlier.

So why didn’t that move stocks higher?

First, in my opinion, because stronger economic growth makes it likely that the Federal Reserve will continue its current rate of tapering off its monthly purchases of Treasuries and mortgage-backed securities. Good news on the economy, then, brings the day closer to when the Fed will start to consider raising short-term interest rates from the current near 0% level. That very idea is a negative for stocks.

Second, because the market is deeply worried about a lack of earnings growth and the decline in initial claims, while good news, it isn’t strong enough to raise current projections for modest 2.8% growth (or so) in US GDP this year. This level of initial claims is consistent with an economy adding about 200,000 jobs a month. That’s better than feared back in December, but not a step up from the current consensus forecast.

With the S&P 500 (SPX) still near all-time highs, and with momentum stocks having had a huge run, there’s just not a compelling reason in any of these economic numbers for buying stocks.

To give you an idea of how that works with momentum leaders, this morning, Deutsche Bank raised its target for Facebook to—ready?—$76 from $75. (Facebook shares trade at $59.21 as of 2:15 PM in New York today.) The reason for the very small increase in target price? The consensus estimates on Facebook revenue now come very close to the optimistic view on Facebook revenue, Deutsche Bank believes. That means there’s just not very much additional upside in the stock. (Of course, after the recent drop, the new target represents a 28.4% gain from here. That’s only compelling, however, if you think the drop in Facebook is over.)

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any stock mentioned in this post units as of the end of December. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.

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