Free Annual Reports
Watch For Falling Stocks
The stock market's rally continues to be impressive, but indicators behind the scenes of the equity markets are anything but. Volume in the market continues to decline quarter over quarter. Average volume in the SPDR S&P 500 (NYSE:SPY) in Q1 2009 was 370 million, in Q2 it fell to 253 million, and so far in Q3 average volume is even lower at 189 million. Investors seem to be exhausted from this rally and are reluctant to invest more in the market, but they haven't quite reached the point where they want to sell yet.
IN PICTURES: Seven Ways To Position Yourself For Recovery
Insiders Are on the Run
Insiders are running for the exits. For the trailing week ending August 25, there was only one insider buy transaction for $4.58 million and 154 sales for $815.6 million. This has been a recurring trend for the past few months, and serves as a wakeup call for most investors to review their portfolios. Insiders seem to have no confidence in their own companies' earnings power to justify current valuations, and this should be a concern for any investor.
Valuation wise, the S&P 500 is trading at valuations that have already discounted the economic recovery plus some. The index is trading at about 800 times (due to hugely negative Q4 '08) earnings per share for the trailing four quarters, 34.5 times the current year 2009 earnings per share estimates, and 28 times 2010 estimates. Only a few times in the past decade have we seen these kind of valuations; one was just before the start of the current crisis, and the other was just before the dotcom bubble burst. The roof on upside potential seems to be near in the current environment; it may be time to start looking to reduce current holdings and rotating to more defensive stocks.
Unload Financials
One sector you should review to reduce weightings in is the financials. With much talk lately of an "exit strategy" from the Fed's quantitative easing policies, the implications of an exit strategy on financials will be significant. No one really knows what will happen once the Fed removes the backstop that's been propping up the sector. The economy could very well plunge into another recession. The unwinding of the Fed's massive balance sheet could lead to significant inflation, or even stagflation. One thing is for sure though, for every action there'll be an equal and opposite reaction, and printing money at the phenomenal rate the Fed has been doing (by purchasing debt the government issues),will not be free of consequences.
Within the financial sector, one financial stock that has been interesting as of late is Citigroup. Shorts in Citigroup (NYSE:C) got squeezed hard last month, with short interest plummeting from over 1.2 billion shares to 343 million shares while Citi shares rose 70% - but it looks like the shorts haven't given up. Short interest in Citigroup for the first half of August rose 81.97% to 624 million shares or 11.48% of the float. In addition, volume in Citigroup got cranked up in the trailing month, with 14 trading days reaching close to or over 1 billion in shares traded, resulting in a low 0.5 days to cover ratio.
Bulls, in all likelihood, will point to this shift in negative sentiment as the prelude for another strong move upward, and it might happen. We might see another panic-driven short covering rally, or Citi might correct back down to its 50-day moving average.
Other major banks haven't seen their short interest change as dramatically as Citigroup. Short interest in Bank of America (NYSE:BAC) increased in August, up 28.22% to 119 million shares, but only 1.38% of the float. WellsFargo
Watch for Falling Stocks
With the Financial Select Sector SPDR (NYSE:XLF) up over 17% for the past month, you'll probably be content to hold on to your current positions. But keep in mind the market indicators in the background could be pointing to a sharp correction that will likely catch you off guard.
Read Analyzing a Bank's Financial Statements to learn more tools to enhance your financial analysis and use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: Seven Ways To Position Yourself For Recovery
Insiders Are on the Run
Insiders are running for the exits. For the trailing week ending August 25, there was only one insider buy transaction for $4.58 million and 154 sales for $815.6 million. This has been a recurring trend for the past few months, and serves as a wakeup call for most investors to review their portfolios. Insiders seem to have no confidence in their own companies' earnings power to justify current valuations, and this should be a concern for any investor.
Valuation wise, the S&P 500 is trading at valuations that have already discounted the economic recovery plus some. The index is trading at about 800 times (due to hugely negative Q4 '08) earnings per share for the trailing four quarters, 34.5 times the current year 2009 earnings per share estimates, and 28 times 2010 estimates. Only a few times in the past decade have we seen these kind of valuations; one was just before the start of the current crisis, and the other was just before the dotcom bubble burst. The roof on upside potential seems to be near in the current environment; it may be time to start looking to reduce current holdings and rotating to more defensive stocks.
Unload Financials
One sector you should review to reduce weightings in is the financials. With much talk lately of an "exit strategy" from the Fed's quantitative easing policies, the implications of an exit strategy on financials will be significant. No one really knows what will happen once the Fed removes the backstop that's been propping up the sector. The economy could very well plunge into another recession. The unwinding of the Fed's massive balance sheet could lead to significant inflation, or even stagflation. One thing is for sure though, for every action there'll be an equal and opposite reaction, and printing money at the phenomenal rate the Fed has been doing (by purchasing debt the government issues),will not be free of consequences.
Bulls, in all likelihood, will point to this shift in negative sentiment as the prelude for another strong move upward, and it might happen. We might see another panic-driven short covering rally, or Citi might correct back down to its 50-day moving average.
Other major banks haven't seen their short interest change as dramatically as Citigroup. Short interest in Bank of America (NYSE:BAC) increased in August, up 28.22% to 119 million shares, but only 1.38% of the float. Wells
Watch for Falling Stocks
With the Financial Select Sector SPDR (NYSE:XLF) up over 17% for the past month, you'll probably be content to hold on to your current positions. But keep in mind the market indicators in the background could be pointing to a sharp correction that will likely catch you off guard.
Read Analyzing a Bank's Financial Statements to learn more tools to enhance your financial analysis and use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Joseph Nguyen
Joseph Nguyen is an Research Analyst and contributing author at Investopedia. He graduated from the University of Alberta with a Bachelor of Commerce degree and specializes in financial analysis and research. Prior to joining Investopedia, he worked at a securities brokerage firm.
Free Annual Reports
