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Last week the S & P dropped by the greatest amount since February amid lackluster earnings for several large cap momentum issues and disappointing economic data.  This week can again be of significance given many of the second tier companies post results, results that can continue to support value as opposed to momentum growth.

Many times I have opined a basic premise for a stock to rally is more buyers than sellers and if everyone owns the company/sector, who is left to buy when selling commences?  Vice versa, if no one owns a company/sector, when buying commences who is left to sell?

For at least five years the markets have become increasingly dominated by ETFs, HFTs, momentum trading, where the big get bigger and the small get smaller.  Ownership is skewed in the same mega capitalized issues.

Goldman Sachs wrote about a month ago the valuation between value and momentum growth is the largest since at least 1980.  Small caps are about 40% undervalued as compared to momentum.

Friday the all-inclusive employment report is released.  While I can write volumes about the possible shortfalls of the data—more specifically the near 40 year low labor participation rate (LPR)—weekly jobless claims are at 40 year lows. This has significant implications for the economy.  Moreover the LPR is up 0.6% for the past six month, the biggest advance over a similar period since 1992.

It is evident he multinational mega capitalized revenue and profit growth has stalled.  Typically a rebound in domestic employment activity has a greater impact on the value/smaller capitalized firms.

I can argue this rebound coupled with massive under ownership of the value/smaller capitalized issues is why these sectors are outperforming the over owned large cap brethren that are priced to perfection.

If Friday’s jobs data surprise on the upside as it has three out of the last four months and if earnings for second tier companies exceed dumbed down expectations, I can argue the transition away from momentum growth may begin in earnest.

Commenting about Friday’s market activity, the dollar fell to a 12 month low, falling for the third consecutive month, the e longest stretch since the two year rally that sent the greenback yup 20%.  The NASDAQ declined about 0.60% as technology and healthcare sold off.  The Dow was down about 0.3%

What will happen today and this week?

As inferred above, this week’s economic calendar is significant.  There is a plethora of manufacturing data released, including the ISM and factory orders, the ISM non-manufacturing statistics, and the many job surveys leading into Friday’s BLS Labor report.

Last night the foreign markets were mixed.  London was down 1.27%, Paris up 0.53% and Frankfurt up 0.91%.  China was down 0.25%, Japan down 3.11% and Hang Sang closed of r a holiday.

The Dow should open nominally higher ahead of big data and earnings week.  The 10-year is up 6/32 to yield 1.82%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.