Investors will continue to ride the speediest rally in U.S. stocks since the Great Depression despite growing concerns that the market is overbought and due for a correction.
Wall Street posted its third consecutive week of gains with the S&P 500 now up 6.8 percent for the year and more than 20 percent in just six months
Regardless of where the stocks start off in the morning, they crawl upwards by afternoon. Analysts expect a correction but they aren’t sure when. There seems to be a tendency for more and more investors to buy.
But there is a perceptible level of anxiety in the market. Trading volume has been exceptionally low recently and the CBOE Volatility Index .VIX, Wall Street’s so-called fear gauge, is up on the week despite the gains in stocks.
So what does all this mean? Are lots of people buying now? What is spurring this buying spree? I sure hope we aren’t headed for another downturn.
I see a lot of money flowing out of bond funds and into stocks, meaning that investors are expecting an inflationary environment. Backing this thesis is the correlation between the dollar and equities. We’re seeing new highs in the indices and not seeing new lows in the dollar, thus I believe that we’re in a transition from a liquidity market to an inflationary pressured market. I also believe that corporate margins have peaked and that the higher input costs will result in one of two outcomes. Either a.) businesses try to raise prices and figure out that they can’t, which will hit their margins or b.) businesses successfully raise prices and people buy less (remember, we have no wage inflation) and revenue will take a hit. Structural unemployment, possible state and muni defaults, sovereign default possibilities, Iranian nukes, Mideast unrest – all of these are good reasons to feel bearish. And none of that matters right now.
I have a big sign in my office that reads “only price pays.” It helps me to remember that regardless of what I think about the state of the world that there is only one truth, and that is price action (which happens to be very strong at the moment). Having said that, a lot of people I know are splitting town next week to ski the last weekend of the season in Vail or they’re headed down to Grand Cayman, etc.. This means that the B teams will be staffing the institutional trading desks next week with very specific instructions – sell longs and cover shorts and don’t call the boss unless the world is about to end. It would be very possible, not to mention healthy, to see the markets correct next week. Conditions are ripe and it would not surprise me to see the markets come back to the bottom of the uptrend channel and consolidate while waiting for the pros to get back from vacation before knocking out the next leg higher: http://i51.tinypic.com/5xjrb4.jpg
I will consider any correction to be a buying opportunity.
Thanks Cato. I guess you are going through cold turkey withdrawal because it is the weekend?
Remind us of the things you tell us. Neanderthal here.
I think I build a neuron or two anytime I see Cato post about the markets.
I’m putting a little bit in to take advantage of things creeping higher, but mostly I’m amassing cash and waiting for “the correction” I’m only interested in nice dividend plays right now. I’ll say this, GE has been very good to me.
@Slow
GE is an interesting stock. I sold mine a while ago…year or two maybe. I have been thinking about getting back in with it. I am also thinking about facebook. Not sure what the IPO will be or when it will be. I have been enjoying the run on silver : slw. It is almost like your name. 🙂
Dividends are a good thing. If you find some good dividends, let me know.
I’ve been buying some silver too. Not too much, but I haven’t lost anything on it, that’s for sure!
@Moon-howler
I’ll remind you of my #1 rule and that is DON’T BE GREEDY. Bulls make money, bears make money, pigs get slaughtered. 🙂
Never let the tax man get in the way of booking big profits. It’s the cost of doing business. If you have a 50% gain on the table take some of it off and let the house money ride, pay the tax man and move along. You never know what might be around the corner, and nobody ever got hurt taking profits. It’s just like you say in the open thread – what looks great today may not look so hot tomorrow and but for the grace of God we’d all be in the poorhouse.
Here’s two of my best “safe” ideas for 2011, one I’m sure you’ve heard of and one you probably haven’t. I’ll analyze speculative momentum names on request (since it is a long weekend after all).
Dover – manufacturing space. Nice, low profile name that is breaking out of a ten year range: ttp://i51.tinypic.com/n5spw6.jpg (add h to ttp to view the image, I didn’t want to go to moderation). This one really has the potential to be a market leader. I’ll be adding more to my existing position upon a correction to 65, more at 62, and then again at 60 (the way I buy and sell is to scale into and out of positions fractionally, usually buying 1/3 positions)
IBM – yes, old boring IBM. Also broken from a decade long trading range: ttp://i55.tinypic.com/281xac1.jpg I’ll be adding to positions here at 162.1, 155.7, 158.8 and I would back up the truck if it sees 151.5 again. This one looks like it has a date with 200.00.
Neither of them are anything to write home about in the dividend department, paying 1.62 and 1.58 respectively, but both are cheap on historical valuation metrics and both have very strong technicals and the fact that they’ve now cleared multi-year ranges is a big deal.
I’m playing smaller than I usually do here because the market is quite stretched and in need of a rest, but I’m not the only one who thinks that and calling market tops is MUCH more difficult than calling bottoms and is generally speaking a fools errand. When everyone is looking for something to happen it usually doesn’t.
For all you dividend hounds put Verizon on your wishlist: http://i56.tinypic.com/ftew5j.jpg
It pays a whopping 5.32% and we will be treated to stories about crushing demand for iPhones over and over again all year long. A break of that trend line should be good for a run up to 46 bucks if not more.
My two “what the heck” things this year were CIM and NYMT. I’m still waiting for my C to go above $5 to see if any institutional interest crops up at that point.
That DOV looks all kinds of interesting.
I am also somewhat interested in a Bakken player this year.
That Bakken looks like it is paying dividends twice a month. Did I misread that?
Check out frg and slw.
I also have been very pleased with chevron and oxy.
I am often troubled by greed. sigh.
My I am still waiting is imsc
It sounds like such a good concept!!
Slow, when you say silver, do you buy the actual hold in your hand rounds or coins? Mine is a silver stream company. It gets skittish as a foal when it gets close to 40 but it has been sweet.
Thanks Cato. IBM and Dov. Gottcha.
What are you hearing about facebook? When is the ipo?
Bullion, ASEs to be exact. I just collect them when I can get a good price and hold on to them. I figure I’ll pass them down to my kids some day. There are many, many Bakken Oil Field plays, and I can’t figure out which one turns me on.
@Slowpoke
Keep me posted on the bakken oil field plays. I saw one that paid dividends several times a month.
@Moon-howler
The issue with Facebook is the SEC rule which stipulates that a company with at least $10 million in assets and more than 500 shareholders must file on a quarterly basis. I’d expect them to go over 500 shareholders by the middle of this year. They’re so secretive about everything I figure they might as well take it public once they have to start disclosing finances and strategy, at least that’s my guess. You 120 days from the end of the fiscal year you surpassed 500 shareholders to comply with the regs, and since Facebook’s ends in December I’d think they’ll come out in April of 2012.
re: SLW.. First let’s look at SLV: ttp://i56.tinypic.com/s2zgpc.jpg
See what’s going on there? That pattern is what I like to think of as a kiss of death retrace where the stock breaks down then comes back up to test resistance where it broke the original trend.
Now SLW: ttp://i54.tinypic.com/id7tau.jpg
SLW, on the other hand, failed to breakdown and powered right back into the uptrend. What worries me is that it’s been making lower highs ever since December. In sum the silver picture is very muddy and the technicals are in disagreement about direction. The most healthy thing that could happen right here is that they chew around sideways for a couple of weeks and work off the overbought conditions. As for me, I sold out of most of my silver plays on Friday, which brings me to Cato’s rule #2.
When the market needs buyers, be a buyer and when the market needs sellers (like this one does), be a seller. Warren Buffet puts it a different way, be greedy when others are fearful and fearful when others are greedy. I try to let that guide my transactions, I buy fear and sell greed. There’s an awful lot of greed going around and no fear at all, so I’ve been selling a lot into the strength. If I’m wrong I can always re-establish positions when the picture clears and SLV captures the uptrend again.
Another of my big plays this year is closed-end muni funds. Not now mind you, but when the fit really starts to hit the shan around defaults and restructuring. This stuff going on in Wisconsin is going to replicate itself to at least half the states before the end of the year. It’s not going to be hard to induce panic selling when you consider who the holders of the muni debt are – mom and pop and very conservative investors – and I’ll be right there to take it off their hands.
Greedy when others are fearful, and fearful when others are greedy…
Hi-Ho Silver, AWAY!!!!
Hi HO Silver, indeed. too funny. I was so disappointed that the markets were closed today. I forgot it was a holiday.
Nasty, nasty selling going on over in Asia. If they can’t manage to turn things around we could open down 1.5%.
Ugh. I hope it stays in its side of the Pacific, Cato. What is causing the nasty selling in Asia?
Libya. Silver is going nuts though so some of y’all will have a fine, fine day.
Tell why. I don’t get the connection. How come that didn’t happen with Egypt?
My guess: Egypt, no oil…Libya, oil (Eastern part of the country).
What he said. Plus, people are skeered that it could spread to other oil producing nations. If oil sustains itself above $100 for a long period of time, we have to rethink our recovery assumptions. Maybe instead of selling 10 million iPads AAPL only sells 9 million because people are paying so much at the pump, and so on and so on for every company out there and all of a sudden stuff starts to look quite overvalued.