Stocks: Surveying the June Wreckage

The equity meltdown spared few sectors, but S&P thinks the market could be in for a near-term bounce

Talk about a tough month. The Standard & Poor's 500-stock index fell 8.7% in June, the worst monthly performance since September, 2002 (–11.0%) and the worst June since 1930 when the S&P 500 plummeted 16.5% (in June, 1962, the "500" was down 8.2%). During the month, 91% (117 of 129) of the industries in the S&P 500 declined, with 64—almost half of all subindustries—slumped by 10% or more. Obviously, the market's action in June created many "Maalox moments."

For the quarter, even though the S&P 500 declined 5.6%, the S&P MidCap 400 rose by a similar amount, while the S&P SmallCap 600 eked out a 1.1% gain. On an S&P 500 sector level, four groups advanced—from 3.3% for Information Technology, to 14.9% for Energy. On the downside, six groups saw red ink: from a 2.7% slump for Health Care, to a 17.3% free fall for Financials. Of the 129 subindustries in the S&P 500, 61% were in the red for the quarter, with 34 declining by double digits.

The worst performers for the quarter were the Casinos & Gaming, Regional Banks, and Homebuilding groups, off more than 30% each, while eight subindustries were up by more than 20% each, led by Coal & Consumable Fuel's gain of 63.1%.

Coal Takes the Top Spot

Since the market top on Oct. 9, 2007, the S&P 500 has fallen 18.3% and remains about 10 points above the 1270 level that S&P's Mark Arbeter believes will be the low for this corrective action. Both the S&P MidCap 400 and SmallCap 600 indexes also posted double-digit declines since the October high. Only the S&P 500 Energy sector advanced since the market's top last year, while the remaining sectors declined from about 3% for the S&P Materials index to more than 42% for the S&P Financials.

Even though only 17 subindustries are in positive territory since the Oct. 9, 2007 high, 10 gained by more than 20% with Coal again taking the top spot, surging nearly 100%. The worst performers consisted of 58 (45%) subindustries that are now in bear-market mode, after having lost more than 20% of their value. Sixteen subindustry indices fell by more than 40% since October, led by declines of more than 50% for Automobile Manufacturers, Consumer Electronics, Other Diversified Financial Services, Regional Banks, and Thrifts & Mortgage Finance.

Oversold on a Near-Term Basis

If there is any consolation to the abysmal performance by the equity markets in the month just passed, it's the S&P 500's ability to stage a recovery—if only for a month. Since 1945, whenever the S&P 500 has declined by 8% or more in a single month—which has happened 21 times—it has risen in 14 succeeding months (67%), gaining an average of nearly 1.0%.

With each passing day investors have received less encouraging forecasts about oil prices, the economy, and corporate earnings, just to name a few. Yet market advances and declines typically occur in a stair-step fashion. Neither bulls nor bears charge in one direction forever. We currently believe the market has been oversold on a near-term basis because of these encroaching concerns, as well as end-of-quarter "window dressing" by mutual funds.

And while we think the risk has now tipped in favor of the S&P 500 breaking below its recent low of 1270, we think the market soon will experience a near-term, counter-trend bounce. How it performs subsequent to that bounce (or even if it never materializes) will be the key.

Industry Momentum List Update

Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (12-month price performances that were among the top 10% of the industries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).

Subindustry Company Ticker S&P STARS Rank Price (6/27/08)
Brewers Molson Coors TAP 5 $54
Coal & Consumable Fuels Peabody Energy BTU 4 $84
Construction & Engineering Fluor Corp. FLR 4 $184
Diversified Metals & Mining Freeport-McMoRan Copper FCX 3 $116
Fertilizers & Agr. Chem. Monsanto MON 5 $128
Gold Newmont Mining NEM 4 $53
HyperMarkets & Super Centers BJ's Wholesale BJ 4 $39
Industrial Gases Airgas ARG 5 $63
Oil & Gas Drilling Noble Corp. NE 5 $65
Oil & Gas Equip. & Svcs. Superior Energy SPN 5 $54
Oil & Gas E&P Swift Energy SFY 5 $63
Oil & Gas Storage & Transport. Williams Cos. WMB 4 $39
Railroads Norfolk Southern NSC 4 $61
Steel Allegheny Technologies ATI 4 $60

Source: Standard & Poor's Equity Research

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