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How Low Can Stocks
Go?
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The Market's Worst
Industries For the Next Few Months
Before
anyone gets a chance to underestimate or overestimate just how bad things
could get for stocks now that the bears are back in action, let's just
take a breath and cue up some perspective.
Yes,
stocks lost about 1% today, and are lower by about 1.8% for the week so
far. That's not a lot, especially considering they're still up by
about 6% from early September's lows. It may feel a little rough simply
because we've all gotten a little bit spoiled during one of the best six-month
stretches ever for the market.
 Nevertheless,
if you just get the feeling we're overdue for a bit of a correction from
the market, you're not crazy - stocks are overbought. That doesn't
necessarily mean a disaster is around the corner though. There are two
potential support levels for the S&P 500 that may nip a major pullback
in the bud before it has time to turn into something longer-term.
The first one
is a rising support line that goes back to May, when stocks slowed their
bullish pace down a bit (but were still bullish all the same). That
line was cracked once in early July, but has been a factor again a couple
of times since then. It's currently at 1018, and climbs a little each day.
The other
potential support level is a 38.2% Fibonacci retracement level at 920.9,
which would clearly be a more drastic 12% tumble from current levels. It
would also be the biggest dip we've seen March. And, almost needless
to say, a dip of that magnitude would convince a large number of investors
that we are indeed headed back into a bear market - which would ironically
be good news for the bulls. Why? The market zigs just when most
people think it's going to zag... seriously.
While nobody
wants to see stocks lose value, the reality is, it's a healthy check against
euphoric buying. Unfortunately, a dip back to support around 1020 or so
may not humble the market adequately. It will likely require a slide back
to the 900's (for the S&P 500) to really inspire the kind of healthy
skepticism needed to let stocks climb a wall of worry at a reasonable pace.
What's healthy
for the market versus what investors do, however, aren't always
the same thing. We'll keep an eye on this chart, so stay tuned.
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The
Market's Worst Industries For the Next Few Months |
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Believe it or
not, there are some industry's stocks that have actually been pretty poor
performers over the last six months; some of them have even taken losses
despite one of the market's strongest rallies in modern history.
Normally we'd
go shopping in those weak groups to find bargains, knowing that yesterday's
laggards are likely to become tomorrow's leaders. In a couple of cases
though, the weakness is apt to persist.
So which
stocks have lost ground over the past six months? Water utilities,
education services, and fertilizer stocks. Though we think water utilities
names may firm up in the near future, a modest recovery and the current
economic (credit challenged) situation suggest 'for-profit' education companies
as well as agricultural chemical companies are facing massive challenges
that will probably continue to hurt their stock's prices.
Let's take a
closer look at each one.
Educational
Services
 Just
to be clear, for-profit education had an absolute field day beginning in
2007, and saw incredible demand through most of 2008. The reason is fairly
obvious... rising unemployment pushed former workers back into the classroom
in an effort to better equip those people for another job. By late 2008
though, demand was starting to peak, and profitability was starting to
come under fire.
Though the unemployment
rate has drifted higher since then, around the end of last year anybody
who was going to go back to school was already back in class. Enrollment
has modestly grown since, but the prior year's growth rate was nowhere
near being matched.
Simultaneously,
tightened lending conditions and a dried-up credit market in late 2008
- coupled with more than a little bad debt - made it even tougher
to be in the education business and remain profitable.
Well, unemployment
has
stabilized, loans (through most lenders) are still tough to come
by, and interest in 'going back to school' has waned as an economic
recovery looms. None of those challenges are apt to ease up soon.
Bottom line?
It's not an ideal environment for these companies, particularly if you're
comparing results from a little more than a year ago.
The S&P
1500 Educational Services Index has seen a slight gain this month, but
is still lagging the market in all timeframes. Looks like the market's
intuition got this one right.
Fertilizer
and Agricultural Chemicals
 The
short version of the story - fertilizer companies gambled, and lost.
Like very other
commodity under the sun, the price of phosphate, potash, and nitrogen (the
main components of fertilizer) went sky high in the economic heyday of
2007. Of course, when times are good and crop prices are high, farmers
are willing to pay those excessive fertilizer prices.
In 2008, things
changed. Crop prices started to fall, as did commodity prices. You know
what didn't fall though? Fertilizer prices. Rather than adjust to
the crimped economy, agricultural chemical companies decided they'd not
be lowering their prices. Instead, they'd collectively hold the line in
2009 at 2008's peak prices.
The bluff ultimately
failed though. Farmers, rather than pay ridiculous (and unaffordable) fertilizer
prices, simply chose not to buy fertilizer this growing season. Better
still, many crops - corn in particular - saw higher yields even
without fertilizer.
It looks like
Potash (POT), Monsanto (MON), and Mosaic (MOS) have finally figured it
out though, after a season of really low sales volume despite really high
margins. Potash and other fertilizer prices have finally dropped.
That doesn't
really matter for this calendar year, as the growing season is pretty much
over. So, don't look for better revenue or higher earnings anytime within
the next couple of quarters.
In fact, don't
look for any improvement from these stocks until crop prices improve (so
farmers can afford fertilizer), and until crop yields start to weaken (since
they seemed to do fine without it this year). Farmers may be feeling a
little spiteful as well, so the rebound may or may not even be in 2010.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
