Financial Professionals

Market Insights

A A A

Another Super Bowl Selloff?

01/23/2011

The holiday-shortened week of January 17 was the first challenging week for investors year to date.  I am certain that there will be plenty more in 2011; that is, of course, the nature of the market. The trick is determining whether selloffs are mere corrections within a larger trend or the initiation of a larger reversal in momentum.

As an example of a larger reversal in momentum, last year's May selloff initiated the baseball season of frustration (Figure 1.1), that ended Labor Day.  More recently, the week following the midterm election in November initiated a three week selloff (Figure 1.2) that was a shallow correction, and opportunity for investors.

Mid-to-late January selling pressure seems to be consistent over the past few years.  Figures 1.3, 1.4, 1.5 below identify how vulnerability has entered the market the past three years post-Martin Luther King Day for what I call the Super Bowl selloff.  In the larger context of the overall market performance in each of those years, those selloffs were corrections, not larger reversals of momentum.

First of all, let's tackle this week's trading. Take a look below at Figure 1.6. The first day of last week's trading, on Tuesday, the S&P 500 Index traded 1296.06 - its highest level since late August 2008.  However, in a classic example of "good news and bad price action," weakness prevailed for the remainder of the week.  Excellent earnings from Apple(AAPL), Google(GOOG), and IBM failed to extend the rally.  So, the possibility does exist that the bell has rung and the Super Bowl selloff is here.

Ok, let's say it is here.  If it is, along with poor price action I need supporting evidence that the positive corporate earnings, resiliency in the global consumer, and developing markets demand are abating. 

The evidence continues to suggest a return to normal

  • The rotation out of safe haven assets continues.  Gold is down over 5% year to date. Silver is down over 11% year to date. Conversely, the heavily large cap Dow is +2.5%, outperforming the S&P 500 +2%, NASDAQ +1.3%, and Small Caps -1.3%.
  • In the "return to normal" thesis, the sector that symbolized the credit crisis would recover the most.  Financials currently lead the 9 major market sectors +3.2% year to date.  I expect the Treasury's response to the financial Institutions' capital strategy plans, submitted earlier this month, to act as a further positive catalyst for the financial sector.
  • Demand for high yield corporate bonds remain strong and is reflected in the positive price action year to date.
  • No evidence of a slowdown in China exists.  GDP on January 19 was reported as 9.8% versus 9.6% prior and 9.4% consensus.
  • Euro debt concerns are not reflected in the price of the euro. Year to date, the euro is +1.77%.
  • The price action of companies reporting earnings this past week certainly suggests a pending correction.  However, margins continue to expand and positive earnings surprises support my belief that 2011 capital markets will appreciate in a "return to normal."

Figure 1.1 Baseball Season of Frustration  

Source: Bloomberg

Figure 1.2 November 2010 Shallow Correction

Source: Blooomberg

Figure 1.3 2010

Source: Bloomberg

Figure 1.4 2009

Source: Bloomberg

Figure 1.5 2008

Source: Bloomberg

Figure 1.6 2011 Year to Date Trading

Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.