Predicting a warm summer in the stock markets
Caution is called for, but the bull market could sizzle through the summer, says a U.S. analyst whose two buys include a Canadian brew.
The world will not end when the bull market does.
(In fact, one evangelical group is predicting that the world will end on May 21, bull market or not, but that’s another story.)
Prudent investors will have taken steps to ensure that a bear market will not sabotage all of their investments.
Still, it’s helpful to have a working notion of what might be coming next. And one U.S. analyst thinks that what’s coming next is more bull.
Of course, predictions are always foggy. And that’s the subject of the cartoon with which Mr. Barry Arnold leads off The Primary Trend.
In this Barron’s cartoon, several executives of an investment firm face a tech support guy in a lab coat. There’s a crystal ball on the desk.
“Can you increase its range?” they ask.
Mr. Arnold, an investment counselor who publishes his advisory in Wisconsin, can generally be found in the bullish camp. His latest issue came out before some of the worst days of the recent slump.
Caution is certainly warranted, this analyst says. He has already taken profits in some commodity stocks. But it’s not time to give up.
This analyst believes the summer months could actually be hot, if not sizzling, on the markets. He also has two leisurely summer buys, one of them a Canadian brew that will get a workout in the months ahead.
The pause that refreshes
Remember, Mr. Arnold tells his readers, that when the market first started to rise from its March 2009 lows, many skeptics wrote it off as a “dead-cat bounce.” Wouldn’t last.
Then as the market corrected in the summer of 2010, there was more hand-wringing over the possibility of a “double-dip recession.”
But the stock market has kept on climbing. The analyst posts a chart in which the Leuthold Group of Minneapolis (his favourite research team) demonstrates that the major U.S. indexes and sub-indexes have been highly correlated all the way. That is, they have risen in unison.
The odd group out has been financial stocks. They hit a new cyclical high in February, but fell short in April. The fact that they still lag the rest of the market could spell trouble, Mr. Arnold admits.
At the beginning of this month the Dow Jones Industrial Average had surged ahead 97 per cent in two years, while the S&P 500 was up over 100 per cent. The last three weeks have told a different story.
A market correction is a decline of 10 per cent or greater, states the analyst. “Anything less than 10% is merely short-term profit-taking or the pause that refreshes.” We have had nine such pauses in the past two years “and we are probably in the midst of #10 as we write,” he wrote.
An art, not a science
Stock valuations are no longer dirt cheap, but they’re not too high, since “earnings have exploded to the upside as well,” says Mr. Arnold.
There is anxiety about the impending end of the government’s Quantitative Easing policy. Yet technical indicators generally remain strong.
Still, this analyst is putting the stock market on probation. He is looking carefully to see whether stocks on the New York Stock Exchange stop hitting 52-week highs — and whether more stocks hit yearly lows.
He’s checking sectors as well. “If fewer and fewer sectors march to new highs and the financials deteriorate further, the stock market’s foundation will falter . . . but not yet,” he states.
“Investing is an art, not a science, and because of that the stock market is subject to the vagaries of interpretation — the bulls, the bears and the ‘in-betweens’.” Mr. Arnold has become more defensive.
Even before the recent sell-off, he had taken profits in energy and commodities and re-directed some of the proceeds into new positions.
“According to our crystal ball, we believe this bull still has room to run, but the risks are greater and prudence is warranted.”
The analyst reiterates a point he has made before. Tracing the Dow Jones Industrial Average back to 1986, the highest annualized rate of return has not been in the winter months of November to April. It has been in the summer months of March through August. The comparable figures are 4.9 per cent in the winter, 5.2 per cent in the summer.
Leisurely pursuits
One of the stocks Mr. Arnold is buying with the profits from his energy and commodity stocks is a Canadian legend, or at least half of it is.
Molson-Coors Brewing (NYSE-TAP) was undervalued even before the market slump, trading at 11 times forward earnings. And the summer swilling season is coming up. He suggests investors buy this stock up to US$50. It’s at $46.54 today, yielding 2.1 per cent on the $0.96 dividend.
His second pick also concerns the more leisurely pursuits in life. DreamWorks Animation SKG (NYSE-DWA) has become an animation powerhouse in the hands of Messrs. Steven Spielberg, Jeffery Katzenberg and David Geffen.
“A blockbuster hit not only generates substantial earnings immediately,” he says, “but its ‘shelf life’ creates a revenue stream for years to come” on DVD, home video sales and TV showings. In addition to its proven winners, DreamWorks is looking for big things from Kung Fu Panda 2 and Puss in Boots.
DreamWorks trades at just 13 times trailing earnings and is highly undervalued if one takes Disney’s Pixar as the standard. Plus it has no debt. Buy this stock up to $30, says the analyst. It trades at $25.09 and does not yet pay a dividend.
The markets are stumbling again today. The bull is on probation, Mr. Arnold repeats, but it’s up to the bear to derail the powerful move up we have seen for two years.
If history is any guide, he concludes, we could be approaching the best three months of the year.
Meanwhile, we approach the first holiday weekend of the summer season. We hope the weather is good to you, with special thoughts for those who have suffered its effects in Manitoba, Alberta and Quebec.
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