Risk-On Trade - Out In Full Force
As the S&P 500 Index (NYSE: SPY) futures and ETF equivalent broke out to new all-time highs on February 24, the charge was led by the usual cast of momentum stocks -- Facebook, Google and Tesla.
While fund managers who lagged the market in 2013 pile into these issues, they must dispose of other issues in their portfolio to free up the cash for their new purchases. The stocks often sold are the high-dividend payers that offer stable returns, but offer limited returns on the original principal.
This phenomena is commonly known on the “risk-on” trade. With the index making new all-time highs after a prolonged struggle, investors perceive the long-term risk as being low and they begin to engage in higher risk investments.
Competition in mobile
Who wants to own an AT&T (NYSE: T), yielding nearly 5.67 percent, or Verizon Communications (NYSE: VZ), yielding 4.54 percent, when there are potential investments out there that may produce 10, 20, 50 or 100 percent gains?
As evidenced by the charts of these two issues, this is exactly what is occurring. After making a multi-year high in April 2013 ($39.00), AT&T is now trading under $32.00, with a majority of the decline taking place since early November when it peaked at $36.80.
So far in 2014, AT&T made a high on January 2 ($35.29) and has been straight down. The low it made during the market swoon in February ($31.74) was the lowest level for the issue since it bottomed in this area back in late April 2012. In Thursday's trading, AT&T is once again approaching this critical support level trading a $31.89.
The technicals for Verizon are not as bad. While AT&T has declined 18 percent from its April 2013 high, Verizon has shed 14 percent from its April 2013 high ($54.31). On a relative strength basis, Verizon is holding up with respect to its February 18 low ($45.45). That recent low coincides with the issue's September 2013 low ($45.08).
Another factor weighing on Verizon has been the overhang created by Vodaphone deal-related selling of Verizon shares. As a result of the Vodaphone's sale in its stake of Verizon, many Vodaphone shareholders have opted to dispose of the Verizon shares they have inherited. Many are not confident in the long-term prospects for the mobile phone business due to its ultra competitive price structure.
Analysts weigh in
Keep in mind, three Wall Street firms have identified the recent sell off as a buying opportunity in Verizon. The first one being Bank of America, who on February 24 upgraded the issue from Neutral to Buy and reiterated its $55 price target. The firm cited Verizon as attractive based on its risk-reward parameters at $46.23, identifying the downside limited to $43.50 (three points at that time) and nine points on the upside to its target of $55.00.
One day later, JP Morgan initiated coverage of Verizon at overweight and a $57.00 price target. The firms believes fears about recent price competition is "overblown" and is already factored in to its current price. The company also noted its current yield and depressed stock price, as it offers an attractive risk-reward ratio.
On February 27, Morgan Stanley reinstated its Overweight rating on Verizon and announced a $52.00 price target, once again citing an attractive valuation following the huge distribution of shares to Vodaphone shareholders.
The only notable ratings change in AT&T over the past few months has been a downgrade by JP Morgan from Overweight to Neutral while maintaining its $38.00 price target. Perhaps its reduction in price of its data plans on February 4 has prompted the “wait and see” approach with the issue from Wall Street analysts.
Keep an eye out
With the “risk-on” trade in full bloom and the market at new all-time highs, the next few days for the market should be very revealing. Since making the new high Monday, the index has made a few attempts to spook the momentum traders and “risk-on” crowd with a few sharp declines in the index.
However, as of Thursday all of these attempts have been futile as the the “buy the dip crowd” and nervous shorts refuse to let index stay in the red for very long. What may determine the next leg up in this bull market will be the indexes ability to maintain its all-time high close from February 25 (1846.25).
Interestingly, the index closed at 1846.00 a day earlier, which coincides with the indexes former all-time intraday high price of 1846.50.
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