Global risk markets are off to a rocky start in 2016, but there are a few bright spots that have managed to avoid the carnage of the first week of trading. Of the 164 Dow Jones industry groups for U.S. stocks, only six are in the green for 2016.
Leading the list is the gold mining industry group, up 5.11% for the year. Miners are tracking the price of the yellow metal itself, which is seen as a hedge against market turmoil. Also on the list are mining (general), distillers and vintners, mobile telecomm, apparel retailers, and utilities. Utilities are defensive stocks that tend to outperform the major indices in times of trouble.
The surprise on the list, however, is apparel retailers, which is up 0.45% as a group. A look at the top 10 year-to-date performers in the S&P 500 reveals retail names that were getting hammered last year, such as The Gap (GPS, up 8.26%), Kohl's (KSS, up 6.70%), Wal-Mart (WMT, up 6.08%) and Macy's (M, up 5.46%). Wednesday, after the bell, Macy's released disappointing sales numbers for the 2015 holiday season--news that investors are currently shrugging off. The company subsequently announced significant layoffs and store closures to trim margins.
Is it time to buy Macy's and Kohl's stock? Probably not.
First, retailers at the top of the list are benefiting from a technical bounce amidst a much larger risk market selloff. The "dogs with fleas" were already shaken off fund balance sheets as part of end-of-year window dressing for 2015. Fund managers have to report holdings as of December 31, so they scramble to buy outperforming stocks while selling underperforming stocks.
In other words, it's likely that funds have already shed substantial holdings of these 2015 losers and are not facing pressure to sell them now.
Second, many apparel retailers suffered because of the unseasonably warm winter. Now that cold fronts are moving throughout the U.S., investors may be looking toward a surge in winter garment sales.
Third, none of the best ten performing stocks is heavily shorted according to data from the Wall Street Journal. Short sellers put additional downward pressure on stocks during market declines. Accordingly, the stocks at the top of the list don't suffer from this pressure.
What to buy
For longer-term investors looking to buy on the cheap, the stocks that are up the most in 2016 might not be the best bets going forward. Typically, after a steep market decline, new leaders emerge, which foment the next rally.
Until these new leaders become evident, investors might want to consider buying stocks that were still outperforming the S&P 500 at the end of last year. This can be measured by dividing the individiual stocks in the S&P 500 by the S&P 500 index itself, and taking the six month difference in this statistic.
Some of the top names on this list are Nvidia (NVDA), First Solar (FSLR), Teco (TE), Activision Blizzrd (ATVI), Amazon (AMZN) and Google (GOOGL).
No one wants to catch a falling knife, but as legendary stock investor, Jesse Livermore, once quipped, "The best time to buy is when blood is running in the streets." Now that we have seen some red in 2016, investors should be cautious when they go bargain hunting.
