November 9, 2011
... “Money managers are unhappy because 70% of them are lagging the S&P 500 and see the end of another quarter approaching. Economists are unhappy because they do not know what to believe; this month’s forecast of a strong economy or last month’s forecast of a weak economy. Technicians are unhappy because the market refuses to correct, and gets more and more extended. Foreigners are unhappy because due to their underinvested status in the U.S., they have missed the biggest double play in decades. The public is unhappy because they just plain missed out on the party after being scared into cash after the crash. It almost seems ungrateful for so many to be unhappy about a market that has done so well . . . Unhappy people would prefer the market to correct to allow them to buy and feel happy, which is just the reason for a further rise. Frustrating the majority is the market’s primary goal.”
... Robert J. Farrell
Bob Farrell was Merrill Lynch’s esteemed strategist for decades. He penned the aforementioned comments in September of 1989 after the D-J Industrial Average (DJIA) had risen from that year’s January price of 2100 to its September high of 2791 without any meaningful correction. Accordingly, those investors waiting for a pullback to “buy” were frustrated. Similarly, present-day investors are pretty frustrated as the DJIA has leaped from its August “low” of ~9940 into last Friday’s high of 11451 without any significant correction. The recent “Buying Stampede” began on September 1st with a 255-point Dow Wow and has continued for the past 47 sessions without anything more than a one- to three-day pause/correction before resuming the onslaught. The latest upside skein has eclipsed the 38-session march into the August 1987 “highs” that preceded the crash, as well as the longest “Buying Stampede” chronicled in my notes of some 40 years. Over the decades I have come to trust my “day count” indicator because it has worked so well. As stated in past comments, it is rare for a “Buying Stampede” to extend for more than 30 sessions. That is why I wrong-footedly turned cautious, but not bearish, on day 33 of the stampede (October 18th) with the DJIA at ~11159. Since then, the senior index has still not experienced anything more than a one- to three-day pause/correction; yet, has also not really moved significantly above the October 18th intra-day high, that is until last Thursday’s 220-point Dow Delight.
Indeed, last Thursday’s triumph broke the DJIA (11444.08), as well as the D-J Transportation Average (DJTA/4923.40), above their respective Spring reaction highs of 11205.03 and 4806.10 respectively, thus rendering another Dow Theory “buy signal.” That signal reconfirmed the Dow Theory “Buy signal” I wrote about last July and continues to suggest the trend of the stock market is bullish. Still, Thursday’s session failed to qualify as another 90% Upside Day because while Points Gained exceed the 90% threshold, Up Volume didn’t, coming in at 89.3% of total Up/Down Volume. Nevertheless, since the late-June “lows” there have been ten 90% Upside Days, accompanied by strong Advance-Decline readings, reflecting the durability of this rally. In fact, the New York Composite Advance-Decline Line is well above its April rally peak and Lowry’s Buying Power Index has risen to a new rally high, while the Selling Pressure Index tagged a new reaction low, late last week. All of this only reinforces my view that any correction will be shallow and brief.
The explosive rally from the June “lows” has lifted the DJIA by some 16%. Meanwhile, the Dollar Index ($USD/76.76) has surrendered roughly 16% from its respective June high into its recent low, causing one savvy seer to exclaim, “Are stocks really going up, or is the measuring stick going down?!” Clearly, that is a valid question. Yet, my sense is the U.S. dollar “sell short” trade is getting profoundly crowded. To wit, I was on a number of TV shows last week where other pundits were beating the greenback like a rented mule. Most of their comments centered on the statement, “the dollar is worthless,” to which I replied, “If so, why don’t you send them to me!” To be sure, while I too am a long-term dollar bear, I think the dollar’s dive is long of tooth and believe it to be near a short/intermediate-term inflection point. Verily, I am confident the Dollar Index will not violate its 2008 “lows” located between 71 and 73, at least in the short/intermediate-term. If correct, a reversal in the dollar’s misfortunes might imply a pause/correction for my beloved “stuff stocks.” Inferentially, both of those thoughts gained traction over the weekend since Barron’s cover story was, “China’s Sure Bet.” The byline read, “With the dollar vulnerable, China for the first time is investing more overseas in hard assets, like copper, oil and iron, than in U.S. government bonds.”
Plainly, last week’s two major events were the mid-term elections and the Fed’s announcement of another quantitative easing (QE2). Both went pretty much as expected. While many negative nabobs think QE2 will not work, I think it will work better than expected. It should be effective at lowering real interest rates, which should improve the fiscal funding metrics. QE2 should also lower people’s propensity to save (read: spend money). The risk is that countries like China may view QE2 as a maneuver designed to get them to revalue their currency upward relative to the U.S. dollar. In fact, last Thursday China, Brazil, and Germany criticized QE2, while a number of Asian central banks announced intentions to defend their currencies. For further color on QE2, please read our economist’s (Dr. Scott Brown) comments attached to this report.
As for the mid-terms, I have argued for months that if the Republicans regained the House, and came close to taking back the Senate, President Obama might just pull a Clinton and move to the “center.” I further evinced if that happens the S&P 500 (SPX/1125.85) would likely cross above 1300 quickly. And last Wednesday a clearly contrite President showed signs of becoming more centrist. Meanwhile, last week’s economic reports continued to come in better than expected with 13 of them above estimates, five weaker, and three on target. The same is true of corporate earnings and revenue reports. More importantly, companies are guiding 4Q10 earnings estimates higher. So again I say, to an underinvested portfolio manager (PM) the current environment is a nightmare! And that, ladies and gentlemen, is why any correction should be short and shallow as underinvested PMs will be forced to buy the “dips” in order to keep up with the Joneses (aka, the Dow Joneses). Indeed, focused on 2010’s year-end, PMs have performance risk, bonus risk, and ultimately job risk by underperforming the major market averages.
Summing the parts, I continue to have a timid trading stance in large part due to my day-count sequence, the overbought nature of most of the indices, and the fact that many of the indexes have spiked above their respective upper Bollinger Bands (rare occurrence). That said, I am not afraid to buy select stocks. Over the past few weeks my preferred strategy has been to buy fundamentally sound companies, with unbroken business models, when they have had a price concession for a one-off reason. On October 14th that’s exactly what happened to NII Holdings (NIHD/$42.73/Strong Buy) when the Televisa deal was called off. On that announcement NIHD shares fell more than seven points in a day and we recommended purchase, as noted in our Investment Strategy report of October 18th. On October 26th a number of announcements caused Lexmark’s shares (LXK/$39.19/Outperform) to collapse 10 points in a day and our analyst recommended purchase in a written comment that same day, as we noted in our verbal strategy commentary that Tuesday. I think such a strategy takes much of the “price risk” out of the investment equation and I continue to invest, and trade, accordingly.
The call for this week: I will be out of the country until November 18th so these will probably be the only strategy comments for awhile. Nevertheless, according to the sagacious Bespoke organization, since April 23rd the best performing sectors have been Telecom Services (+15.6%), Materials (+6.0%), Consumer Staples (+4.3%), and Utilities (+4.1%). Interestingly, the Financials are down by 7.9% from that same date, yet last week the Financials made a strong reversal and registered a massive upside breakout in the charts. While I have not recommended banks in 10 years, if I were to buy one it would be Strong Buy-rated IBERIABANK Corporation (IBKC/$54.22). Please see our analyst Michael Rose’s company comment of October 28, 2010 for more insight. I’ll speak to y’all in a couple weeks.
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