Think of the huge jump in stocks Sept. 1 as a dry run for the eventual stock market rally.
I don't think that rally is here yet. I think the move last week was a bounce, a very welcome bounce but still a bounce, as the extreme pessimism of the end of August swings to something like only mild pessimism. Investors had a chance to think about the course of the market over Labor Day weekend and returned in a selling mood Tuesday.
As we have been for most of summer, I think we're still in a range-bound market, with a top near 1,130 for the Standard & Poor's 500 Index ($INX). But we're seeing positive signs that the market is getting ready for a sustainable move above that range. The Sept. 1 rally began from a level above the July low. Rallies begin when stocks start posting higher lows, so I'm guardedly hopeful about stocks as we head into the fall.
But can I tell you that the stock market has bottomed? Can I guarantee that it's all up from here? No way. I don't know that even after the big move of Sept. 1.
Finding the outperformers
Not surprisingly, the best performers Sept. 1 were those stocks where worries about global economic growth had weighed most heavily in July and August.But I think we can go a bit further than that terribly vague observation. To get ready for a rally in the last quarter of the year (or so), I'd also look for the stocks of companies where the swing in revenue and earnings will be particularly pronounced if the global economy grows with even modest strength.
And I'd look especially for stocks with those characteristics that are, in addition, commonly thought of as particularly risky because of their industry and/or their exposure to emerging markets.
Let me give you some examples that popped out at me after Sept. 1. You may not want to buy these specific stocks (now or perhaps ever), but they certainly are good pointers to the sectors and stocks that you do want to buy.
For a stock to get my attention in the Sept. 1 rally, it needed a jump that was way above the 3% gain recorded by the S&P 500 that day.
Click graphics to see interactive charts
KB Home
Beazer Homes
Hovnanian Enterprises
Lumber Liquidators
- Among homebuilders, KB Home (KBH, news, msgs) was up 11.1%, Beazer Homes (BZH, news, msgs) 9.5% and Hovnanian Enterprises (HOV, news, msgs) 7.6%. Shares of companies that depend on the health of the homebuilders also gained; Lumber Liquidators (LL, news, msgs), for example, gained 7.1%.
- Among oil drillers, Rowan (RDC, news, msgs) climbed 9%; Pride International (PDE, news, msgs) was up 7%.
The rally also helped a few stocks in special situations, such as Burger King (BKC, news, msgs), which jumped after a buyout offer from a Brazilian investment fund.
These patterns are interesting, but I don't find them compelling. In most of these cases, the stocks that popped in these groups are companies still fighting huge head winds. Fixing the problems of oversupply in the housing industry, for example, isn't a matter of just a good quarter or two.
But also among the best performers -- and this is where I'd say the most interesting action was Sept. 1 -- was the cyclical group, the stocks of companies heavily leveraged to the economic cycle. Cyclical stocks are historically one of the sectors that rise fastest when the economy recovers. If investors were expressing a little more optimism about the economy Sept. 1, it's exactly these stocks that should have soared.
And that they did suggests you'd like to be over-weighted in this sector when the real turn in the economy arrives.
