Waving red flags at a bull market
There may be red flags telling investors to watch out, but this U.S. advisory claims there are still good times ahead and stocks to buy.
Just because things are good doesn’t mean they’ve got to turn bad.
Yet that seems to be the attitude of many of the observers who regularly pick over the entrails of the stock market.
After a market rally that has kept its momentum for ten months, we must surely be in for a fall, they suggest.
Not necessarily, says one U.S. observer. Mr. Barry Arnold isn’t just looking at pies in the sky. He has very specific reasons for thinking the stock market is not going to sink.
He admits there are four red flags that might suggest the opposite. In the latest edition of The Primary Trend, published from his investment offices in Milwaukee, Wisconsin, he examines each one and finds they are not as frightening as they may first appear.
Before we get to the flags, we’ll take a peep at this analyst’s portfolio. If the market is going to forge ahead, then the stocks he calls ”Special Situations and Turnarounds” should have some interesting days ahead.
The two largest gold producers
Four stocks in this special portfolio are buys. Two of the “special situations” are gold stocks. No matter which way the market goes, gold remains the preferred way to hedge one’s bets.
They are the two largest producers in the world. Barrick Gold (TSX/NYSE-ABX), of course, is number one. In Toronto it is trading at $41 and yielding one per cent on the dividend of $0.41.
Newmont Mining (NYSE-NEM; TSX-NMC) is number two. On the TSX it trades at $49.50 and yields almost one per cent on its 43¢ dividend.
Next is an obvious turnaround stock, homebuilder D.R. Horton (NYSE-DHI). Its chart looks like the jagged edges of a broken window, but it has been trending upward of late. It is trading at $12.31 and yields 1.2 per cent on its little dividend of 15¢.
Finally there is the world’s largest and most multi-tasking oil services firm, Schlumberger Ltd. (NYSE-SLB). Its shares are at $71.90 and its $0.84 dividend is yielding 1.2 per cent. The “special situation” with this stock, of course, is rising oil prices, and it has been rising with them.
The third scenario
Where might these and other stocks be going in the months ahead? Naturally, there are a host of conflicting opinions on the matter.
Mr. Arnold rejects two points of view right off the bat. One comes from those who believe this is a new secular bull market — that is, a trend that will last for years. He doesn’t go that far.
Others claim that this is no more than a counter-rally in a bear market — “but they have argued that point since the initial lift-off and have been fighting the new recovery highs with each and every step upward.”
He believes a third scenario. It’s a simple one, based on the evidence so far. Stocks are in a cyclical bull market. The question is how long this cycle might last.
“Does the fact that 2009 returns are so strong and that the moves off of the March lows are mind-blowing negate an encore performance in 2010?” asks Mr. Arnold.
Historically, he answers himself, a strong market one year does not necessarily spell trouble the next. Yet this continues to be “the most disrespected bull market that we’ve witnessed at least since 1988.”
The climb up the proverbial wall of worry is alive and well on Wall Street, he points out, and many investors have not even gotten back in the game yet. What will happen if they actually start jumping in?
Technically, the path of least resistance is up. Looking at the moving averages on the S&P 500 Index, this analyst sees no reason to alter his bullish outlook at the moment.
The red flag district
But now let’s go to the red flag district, which is the place the pessimists go to find signals of trouble ahead.
The first of the four red flags that might spell danger on the market is a technical one. The climb to new recovery highs has been a broad-based affair, Mr. Arnold says, as evidenced by the Advance-Decline Line hitting new record highs. When this line diverges and shows a heavier group of stocks declining it will be a warning shot across the bow.
But it hasn’t happened yet.
The second flag comes straight from the horse’s mouth — investment advisories. The benchmark Investors Intelligence poll shows three times as many bulls as bears. That usually means an excess of confidence.
Yet skepticism abounds among investors, Mr. Arnold insists. “Subjectively, we have lost a generation of investors due to the financial meltdown, similar to the exodus experienced during 1973-74.” And still the market rises on this wall of worry. Only when the mood changes from one of doubt to unbridled optimism, of “throwing caution to the wind,” will we have a red flag on investor sentiment, he claims.
The third danger signal stems from the claim that stocks are overvalued. But they’re not at extreme levels, the analyst asserts. According to Leuthold Research, a group Mr. Arnold holds in high esteem, the valuations on the S&P 500 are in line with “modern era” bull markets.
Earnings growth could propel them higher and a double-dip recession could push them lower. “Lofty valuations, however, are not yet a threat to this market.”
Finally, we turn to those stocks that are supposed to lead the market but who have been dragging their feet, to say the least — financial firms. If this new bull market is to have legs, they must re-assert themselves. “The financials’ price action is currently a yellow flag, but that could change to green,” the analyst says.
When Mr. Arnold went to press, both the S&P Financials Index and the Bank Index had rallied. But that was before the president announced he was taking the Wall Street banks to the woodshed. That may put a crimp in their charts, at least for a while.
Stock prices “tend to stretch like a rubber band,” concludes Mr. Arnold. They have snapped back from depressing lows, he reminds us, and until the rubber band hits the red flags, you are free to feel optimistic.
|
E-mail this article
Printer-Friendly
