by Louis Basenese, Advisory Panelist
Wednesday, April 8, 2009: Issue #974
Believe it or not, but based on the classic Wall Street definitions, we’re in a new bull market. As of last Friday, all three major market indices recovered more than 20% from their March 9 lows.
Of course, we’ve been here before. Or as Yogi Berra liked to say, “It’s like déjà vu all over again.”
Recall, back in November of 2008 the markets began an impressive run-up, hitting the 20% milestone, too. Then all hell broke loose.
As a result, not every market observer, myself included, is completely convinced by the recent move. But I will say this – seven notable differences exist between then and now, leading me to believe this very well could be the start of a new bull market.
- There’s hope for housing.
On Tuesday CNBC did a feature story on home sales in foreclosure central – California. In one suburb outside Stockton, where one out of every 67 homeowners received a foreclosure notice last month, new home inventories miraculously plummeted from 130 to just 17. One builder went from four sales in five months to nine sales in one month. Tax incentives definitely played a rule. Nevertheless, the trend jives with the latest overall market data.
Recall, new homes sales jumped an unexpected 4.7% in February. It also lends credence to newsletter guru Dennis Gartman’s latest prognostication that “we’re going to have a shortage of housing in the not too distant future.”
Another positive – lumber prices, a leading indicator for the housing market, rebounded roughly 30% in the last three weeks. (The housing market accounts for two thirds of lumber consumption.) Add it all up, and this data is hardly overwhelming. But it’s certainly less bad (see # 3 below to understand why).
- Takeover rumors are moving stocks again.
In a clear sign of optimism and normalcy, takeover rumors are once again returning to the market. And, more importantly, they’re moving stocks and spurning heavy call options buying. For proof, look at the recent moves in Black & Decker (NYSE: BDK), Textron (NYSE: TXT), Allergan (NYSE: AGN) and Illumina (Nasdaq: ILMN), to name a few.
- From bad to less bad.
Home sales. Durable goods orders. The ISM Manufacturing Index. These are just a handful of the economic data points that have gone from bad to less bad in recent weeks. At the same time, financial companies are beginning to wean themselves off of their government handout dependency.
Five banks announced they returned money given to them under the TARP program. And the TED Spread – a key indicator of perceived credit risk in the economy – is back below 100 basis points (bps) after peaking last October at 464 bps. (Keep in mind, the historical average TED spread is 30 basis points, so there’s still a ways to go.)
- No halitosis.
The November rally that faltered was led by defensive stocks and lacked breadth. In other words, a large portion of the market did not come along for the ride. However, this go-round we’re witnessing widespread strength, particularly in financials, commodity related companies and semiconductors, suggesting the move is sustainable.
- Volatility is dropping.
Right about the time we accepted one-hour 400 point swings as normal, their prevalence dropped off considerably. Look no further than the CBOE Volatility Index (VIX). After peaking at 89.53 last October, it’s back down to more reasonable level around 40. More simply put, the expected market vulatility has been cut in half.
- The market’s always out front.
Countless studies prove the market is the best leading indicator, rallying three to seven months before the economy bottoms. That doesn’t mean we’re immune to head fakes. The classic example comes from the last “severe” recession from 1973 to 1975, when stocks rallied in early 1974, only to stumble again.
But talk about history repeating itself. We experienced the same false rally late last year.
Just like in 1975, when the Dow rallied 36.2% in the three months before the recession finally ended, the recent market move could be the real deal, too.
- Bears out proselytizing bullishness.
In a clear sign of a market bottom, the most bearish investors in recent times found, well, bullishness. This includes Jeremy Grantham, who hated stocks for the past decade; Bill Fleckenstein, who shut down his 13-year-uld bearish fund to go long stocks; Steve Leuthuld, whose Grizzly Short Fund rose 74% in 2008; and Whitney Tilson, another one of the most bearish fund managers in recent years.
Don’t be quick to discard their change of heart and bullish comments as mere bloviations. These guys are the real deal, having predicted the downturn well in advance… and profited from it handsomely.
Turns out they’re already leading the charge, outpacing large caps by a full six percentage points since the March 9 lows, based on the Russell indices.
If you haven’t positioned your portfulio accordingly, take heed. This could be your last chance.
Today’s Investment U Crib Sheet
Looking for an innovative company, or one with a significant first mover advantage?
Don’t rely on Wall Street… most of the fast moving companies on the markets today don’t get coverage from them. It’s why finding these companies is so difficult, and profitable. If you’re looking to get into one of these “hot rods” there are four factors Louis Basenese looks for:
- Innovation. Is there product something that has the potential to be big – really big? We’re talking about an innovation with a $1 Billion market opportunity.
- Magnet for Private Capital (Venture Capital or Private Equity). Most companies start out with seed capital so look for really good innovations that have been well funded. When a number of venture capitalists are rushing to pour money in, you can bet that they know it’s potential. And it gives you an inkling on what the market will do to the stock price once they find out about it.
- Get in early on within 5 years of the IPO.
- Make sure the company has a major index listing. The financial requirements a company must go through to get listed vary by index. But the larger the index, the more financial hurdles a company has overcome.
Lou likes to think of his trading philosophy like this, “We’re swinging for the fences but only with small calculated risks.”
So he keeps his allocation and position size small:
- 10% to 20% of total portfulio max into these hot stocks.
- No more than 1% in any single stock.