“Torque – def – The rate of change of angular momentum of an object”
It is good to have torque in our investments. Torque means the force that builds beneath a stock and precedes a sharp rise. For the most part, the whole stock market has a great deal of torque to it. Regardless of the stream of bad news, the stock market has been able to launch impressive bounces. Fluctuation in the stock market exhibits human behavior and reflects fear and greed. This behavior causes torque in stock prices. Once stocks get tested by some ups and downs, they become like coiled springs and can surge substantially. We saw this during the second quarter with stocks like Expedia up 44%, Sherwin Williams up 18%, and Ebay up 16%. (Forbes) These companies had the torque that was stored up after they tested narrow ranges in their prices. The caveat is that stock selection becomes crucial. The force does not happen with every company so finding those that have the best torque is the challenge that can pay off for investors.
Sometimes torque occurs in companies that encounter business difficulties. Not always, however. With troubled companies, it is important to discriminate between comeback candidates and their stricken brethren. Could there be torque in Research in Motion? Probably not. On the other hand, torque does build when a company’s stock price declines and business prospects remain strong. Examples might be in Mosaic Fertilizer, First Solar, or Nordstrom.
Torque also builds in massive growth stories that have already staged long term advances. Apple computer consistently exceeds investor expectations but it still has torque from people selling to take profits. Amazon, Dollar Tree, and Monster Beverage are also similarly poised examples. Sudden gains can happen from these companies even as they sit at elevated levels.
With the midpoint of 2012 reached, financial markets are creating torque. Steadily, doors are opening and opportunities are being paved. Over the next several months, many more stocks will stage substantial gains from the torque effect.
2nd Quarter Overview
The S&P 500 fell 2.8% in the second quarter. Economic worries and the Euro debt crisis dropped the index 10% in May before June led to a 4% recovery. Eerily, in 2011 and 2010, stocks were also been down sharply between April and September. Last year, we fell 22% from the April high level to the September low. This year, market characteristics don’t suggest a repeat of last summer. Most stocks are above their moving averages. This is consistent with an upward slope to the stock market. (Source:Big Charts)
Will the summer months be as bad in 2012 as they were in 2011? There is a growing sentiment that our economic predicament is worsening. Mainly, the job market has not been improving. The US added 677,000 jobs during Q1 vs only 225,000 in Q2. (IBD 7/11/12) June marked the fourth month in a row of puny job creation. Experts are settling for scant improvement before year end.
Meanwhile, our economy continues to stir recovery concerns. All gauges point to a further slowdown. Bespoke Investments Earnings Revision report cites downward earnings revisions at their highest level since 2008. It follows that expectations for companies are very low. In the face of these low expectations, it is realistic to expect an upside surprise for the stock market. The current economic worries may already be baked in.
Attention continues to be on our Federal Reserve. Different forms of quantitative easing are suggested by policy makers but these are probably not going to leave the shelf unless our economy worsens. This is a perfect environment for bonds to thrive. Long term Treasury bonds returned 9.0% total return during the 2nd quarter. This was the best performing investment class in Q2.
Peregrine Returns and Strategy
Facebook was a headline mess in the second quarter. Our client investment returns suffered from investing in this IPO. Trading profits served to offset this loss but the disappointment surrounding this offering dealt the IPO market a black eye.
Despite Facebook and a declining market, our Equity and our Balanced Composites broke even for the quarter. These results were better than the 2.89% loss for the S&P 500 in the same period. Losses for the average stock market mutual fund were even worse, falling 4.6%.
Since we have economic headwinds, caution is warranted. It is necessary to respect weak economic data and take the proper security measures. More importantly, however, is that any correction in the stock market will be mild and brief. Mainly, the torque building in stocks gives investors an advantage. Investors can receive greater upside return than their downside risk.
Past performance is no guarantee of future results. Investment management involves the possibility of losses. Significant general stock market moves up and down can influence the performance of client portfolios. Composite returns are based on client portfolios of over $100,000. Not all clients are included in the composites. All returns include the reinvestment of dividends. All returns are net of fees. Composite returns are derived from aggregated, time-weighted returns for clients of Peregrine Asset Advisers. Individual client returns can deviate from the composite returns. While Peregrine uses the S&P 500 as a benchmark, Peregrine does not attempt to mimic the structure of this index. Individual client portfolios vary. The number of securities held also varies per client.
Do you have questions or would you like to know more, contact Dan Botti.