New Highs

So much for the sharp selloff and mini bear market during May-July. The market slowly but steadily based, came back and now the S&P 500 is trading at new 52 week and 5 year highs. Just 4 months ago the market was in the throes of concerns over earnings, interest rates, the dollar, geopolitical risks, commodities and housing crash. And just like that earnings are ok, rates are down sharply, the dollar is stable, geopolitical risks have softened (a little), commodities took a nosedive and housing has become less of an urgent issue. Nothing like a 75bps drop in 10 year Treasuries!

The relative weakness in small and mid caps and the relative strength in large caps and in particular utilities and reits suggest a flight to quality and a flight to interest sensitives. Why would this occur? The sharp drop in interest rates suggests a weakening economy. The relative weakness in small and mid caps, i.e., the average stock, would confirm the weakening economy idea. The relative strength in large caps, utilities, and reits could confirm this idea as well. Large caps are safer so they catch the majority of the equity money, utilities and reits are competitive to interest rates so they also get more funding.

Right now the market is saying there's an economic slowdown of some sort coming but it's going to be ok. The market is looking past the abyss. If news regarding the slowdown turns even a little uglier, then the market will take a turn for the worst. But, many stocks are telling us worrying is a waste and there are good opportunities ahead of us.

The capitalist system has its faults like anything else but there are the highlights, too. Capital gets reallocated quickly and success stories rise to the top. Despite many worries, the companies that are well positioned to capitalize or get past the current environment react favorably. The decline in the late spring/early summer cleared the decks of speculation and set the stage for the next round of winners. (That will lead to new speculation but more on that at another time.) Frankly, the new breed of winners are everywhere and a little digging and careful research will yield much fruit.

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Untitled

Since the last entry the market has continued to rise. The wall of worry is certainly a lot of talk but in reality sharp declines in commodity prices and continued weakness in interest rates are doing wonders for equity prices. And they will continue to do that but a rally in gold, oil, copper, et al is due and will come as the market flirts with 5 year highs. That's the perfect sort of conundrum the market poses: new highs that give way to a little weakness as anti-equity securities gain in price. Enough to keep the wall of worry intact.

Two recent books that I read that are worth sharing. The Little Book That Beats The Market presents interesting ideas about investing that I found interesting and will continue to analyze. In addition, the book describes the wisdom of an allocation process that is closely related to the way my firm manages money so that was gratifying! Reminiscences of a Stock Operator tells the story of Jesse Livermore, one of the most famous speculators in Wall Street history. The book is loaded with exceptional ideas about trading along with Wall Street history. It's a great read and may help your market performance as well.

Let's pay careful attention to market leaders and see how they react to this so far small pullback. That should answer lots of questions.

Follow Through

Wow - this market just doesn't quit. The S&P 500 is closing in on the May high which would also be a 5 year high. Mid and Small cap names act well, too, but not with the same strength as the blue chips. There certainly feels like a flight to quality however, large caps lagged the last year of the rally and perhaps this is nothing more than reversion to the mean, for whatever reason.

Commodity prices have fallen hard and that is probably helping the bullish equity case. There are many bullish stocks (on a technical basis), too. It's a peculiar market as just a few months ago the fundamentals looked lousy yet now the market is in gear. Just how far the market is looking ahead is an unknown but it's got to be quite a distance. As a friend said, "at least past the coming recession".

Having spent a few days in DC this week, I can also report that the opinion there is that the President/Administration will be doing what can be done to pressure oil prices lower in order to help results for the the November election. And that would be helping the market as well. Is it possible that the powers that be can talk oil prices down for 60 days? If it is, then we should expect more of the same from the market. And then we are in the seasonally strong part of the year...

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Big Rally

As if on cue, the market broke out of its volume slump yesterday with the first above average volume day in over a month. Today the above average volume continued with a big jump in prices as well. Both large cap and small cap are faring well while utilities are lagging. But there's always something to worry about!

Is it falling oil prices? Or falling gold prices? Or (generally) falling bond yields? Feels like the worry has drained from the market. Yield stocks are getting soft while industrial/riskier names are rallying which supports that thesis. Of course we have to worry anytime we start to feel committed to a market move but one look at the major market index charts suggests the scare that began May 5 was just a scare.

Stay tuned...and please check out web site for more detail about our investment strategies and philosophy.

Back to Normal?

Labor Day has come and gone but normal market volume has not yet returned. (They left the Hamptons and went to the US Open?) This week there were two up days and two down. The two down occured on noticeably higher volume than the up days. And the selloff was tougher than the rallies. This is the sort of thing that I have been concerned with for the last month. (see previous posts) Another point that caught my attention was this week's weakness in stocks, oil, and gold. Bonds sold off, too, but rallied back considerably. This is a confusing message from the market.

Our opinion of keeping a lower risk profile with larger than normal weights in bonds and cash remains. But we would use weakness to build positions in stocks. There are many names that appear to have solid technical patterns, matching strong fundamentals and earnings growth potential. That is precisely where we will focus.

Despite my cautious view towards stocks, equities have a lot going for them. Their resiliancy this summer along with the recent decline in interest rates and oil prices create a bullish environment. The relative weakness is small and mid indices is problematic but at the same time, those indices are building ok bases. (More troubling is the lack of confirmation from the Transports.) Finally, many stocks and indices look ok when taking a multi year view. Yes, they declined hard this summer but in many cases stocks and indices came to support from 12 - 18 months earlier. It's certainly possible that this selloff was a pause and a better market is ahead of us.

Enjoy the weekend.