One Sector, Two Plays, Big Money
Here’s a quick rundown of what you need to watch in the stock market as April winds down.
S&P Struggles: Stocks continue to struggle to gain any upside traction. The S&P 500, Dow and Nasdaq all stumbled once again heading into the end of last week.
That’s the same tired, sloppy trading action we’ve seen for the past three weeks, as late selling erases most of the earlier gains.
The bulls lack conviction.
It’s a nervous stock market right now. Friday’s sell-off was triggered by one stock, Apple (NASDAQ: AAPL). The tech darling did a faceplant, losing 4% Friday amid news that iPhone X sales are soft and production cutbacks could occur sooner than expected.
You might have thought the market sell-off would be limited to high-tech, but that wasn’t the case. Negativity was widespread with 10 of the 11 S&P sectors closing lower.
Upbeat Earnings: The selling pressure in stocks is coming in spite of mostly stellar corporate results. 80% of S&P 500 stocks reporting to date have beaten bottom line earnings estimates. 72% have exceeded top line expectations.
The average earnings beat rate stands at about 6% above analyst estimates. Better than average.
Right now, S&P profits are on track to grow 18% year-over-year. The best growth rate in seven years!
Trouble is stocks, and certain key sectors, are struggling to capitalize on positive profit results. Take financials for example.
In spite of solid earnings surprises from JPMorgan (NYSE: JPM), Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS) and others, these stocks traded lower.
That’s a red flag worth watching.
The issue here is interest rates. Yields on benchmark 10-Year Treasury bonds rose again to within a whisper of the magic 3% mark amid fears of inflation.
This has many folks nervous. As the yield curve flattens, it hurts profit margins at the big banks, hence the lackluster response to earnings beats.
Keep a watchful eye on that 3% level for Treasury yields. If it’s decisively pierced on the upside, it could lead to more selling of stocks.
On a more positive note, one sector does stand out right now.
And I have been recommending folks look for buying opportunities in this sector.
Crude is flirting with $70 a barrel, a favorable tailwind for energy stocks. Additionally, they are posting exceptional earnings growth this quarter.
Every company in the S&P energy sector reporting so far has beaten estimates, with earnings on track to grow 78% year-over-year.
You read that right… Nearly 80% quarterly profit growth for energy.
Two of my favorites in the oil-patch are Royal Dutch Shell Plc (NYSE: RDS.B) and Energy Transfer Partners (NYSE: ETP).
Both are up substantially since I recommended them to paid members of my Infinite Income letter.
Plus, RDS.B pays a 3.7% dividend yield, while ETP pays 11%!
Bottom line: Keep a watchful eye on earnings and interest rates to shape the trend for stocks in the weeks ahead.
Be wary of stocks and sectors, like financials, that are stumbling in spite of good earnings. Instead focus on stocks and sectors propelling higher by positive profit surprises, i.e. energy.
And stay tuned. I’ll have more great plays in my coming issues.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch