When stocks keep climbing the wall of worry
Worry on, this U.S. analyst tells investors — it’s just the thing to keep this cyclical bull market roaring. He has two stock picks along the way.
“My stocks are all going up again. Is that a bad sign?”
That’s the caption in a cartoon in which a group of investors watch a digital stock ticker in a darkened room.
And it’s a perfectly good question, says Mr. Barry Arnold, who publishes the cartoon in the latest issue of The Primary Trend.
This U.S. analyst notices that a lot of people are getting fidgety over the long stock market rally. They’re waiting for a very big shoe to drop.
But that’s a good thing, he says. The “proverbial wall of worry” is just the thing to put some backbone in a rally — “it fuels the durability and sustainability of this new cyclical bull market.”
Note he said cyclical, not secular. A secular bull market would last for a very long time, with a few cyclical bear markets thrown in.
Before we see precisely how Mr. Arnold views this market from his investment counselling offices in Milwaukee, Wisconsin, we’ll look at two stocks he likes as they climb this wall of worry.
A fast one on Wall Street
Alcoa (NYSE-AA) has been climbing a wall of its own and appears to getting back toward the top. The world’s largest aluminum producer pulled a fast one on Wall Street.
Analysts predicted a loss of $0.10 per share for the company in the third quarter, and Alcoa responded with a profit of $0.07 a share. That’s its first profitable quarter in a year.
Alcoa has been paring costs and now has $1.1 billion in cash on its balance sheet. Mr. Arnold believes the company is still in the early stages of recovery “enmeshed in a global commodity recovery overall.”
After he bought the stock in early September it jumped 25 per cent. Now it has slipped down again. It’s at $13.87, which makes it a buy for this analyst, who recommends it below $14.
Overpaid for Spider-Man?
A friendly takeover of Marvel — a legend among comic book readers — is a “huge strategic positive” for The Walt Disney Company (NYSE-DIS), Mr. Arnold says.
The Street believes Disney overpaid for Spider-Man, the X-Men and Marvel’s other comic heroes. But in the long run, this can only help Disney’s growth, the analyst tells us, although we may not see the full results in earnings per share until 2012.
Nonetheless, the stock remains undervalued, trading at 14 times projected 2010 earnings, “historically cheap” for Disney.
Buy it on weakness under $27, he says. Right now it’s at $28.92.
It’s certainly worth noting as well that the editor recently added as “special situations” Barrick Gold (TSX/NYSE-ABX) and another gold miner with a Canadian connection, Newmont Mining (TSX-NMC; NYSE-NEM).
Letdown or run-up?
Just over a month ago, Mr. Arnold tells us, the stock market did something it has never done at any time since World War II. It made its third major thrust during a rally.
That thrust comes courtesy of a technical indicator called Break-Away Momentum (BAM). This measures the 10-day moving average of the ratio of daily advancing stocks to daily declining stocks. When it tops 1.97, a new buy signal is triggered.
In mid-September that signal was triggered for the third time in less than six months. This has only happened four times before, all of those in the 1930s. Of course, those weren’t exactly golden days for the market.
Yet when BAM has indicated double buy signals in the post-War era, each preceded a bullish run for the market. So do we get a ‘30s letdown or a post-war run-up?
“We prefer the latter and are willing to give the 2009 stock market the benefit of the doubt,” says Mr. Arnold.
Very, very contrarian
But what could derail the market’s momentum in the months ahead, the editor wonders out loud. The greenback.
Most investors know that when the U.S. dollar goes down, the market goes up — and so do all those things denominated in U.S. dollars, such as oil, gold and other commodities.
Obviously a weak dollar creates inflationary pressure and could push interest rates up again. Thus most people are prone to believe that if the dollar hits bottom and starts to rally, stocks would suffer.
So here’s a very, very contrarian thought from Mr. Arnold. “What if ... what if ... the rallying dollar actually restores confidence, smothers the inflationary flames, postpones drastic interest rate hikes and therefore causes stocks to rally further?”
He’s not actually predicting that outcome, but “the preponderance of lemmings in the ‘strong dollar bad for stocks’ camp makes us wonder if just the opposite might occur.”
In the meantime, if your stocks are going up, grin and bear it.
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