This Week’s Battle Plan
The Market Speaks
This column is intended to teach. I
rarely (very rarely) make market calls here, especially longer-term
market calls. I have a tough enough time trying to figure where prices
will be in the next one to three days — never mind where they’ll be a
few months from now. But, a few times every year the market speaks to
us. And it speaks in a very big way. It did this, for example,
after September 11, 2001. Nearly everyone was predicting that prices
were going to collapse and that the economy would be devastated. But,
as I pointed out three weeks later, if that was true, why were the
retailers rallying? Why were the semis higher, and why were the
brokerage houses also moving higher? It was because the market was talking.
It was saying, “Yes, I know there are more threats of terrorism,
yes, I know we may be at war, yes, I know the American public is
scared and potentially not in a spending mood, but I don’t care.”
Prices have factored that in. In fact prices have not only adjusted
for this reality, they have overcompensated for it. And, over
the next two months the market rose 10%, the SOX rose 50% and the
brokerage index, as measured by the XBDs, rose by 22%. The market was speaking.
And those who were listening were handsomely rewarded.
Today
The market is again speaking to us. It spoke on Thursday and
especially Friday. So did the bond market. Both are telling us that
the recession is very likely over. And that stock prices will rise. No,
they may not rise Monday or next week. But
they will likely rise over the next few months. Why? Because they
completely shrugged off negative news on these two days. The type of
news that usually kills stock prices and makes bond prices scream
higher. On Thursday, the retailers announced bad news. The news said
(looking backwards) that consumers were not buying. “Toys ‘R’ Us profits will be
less-than-expected,” read the headlines. Wal-Mart’s same-store sales rose the
least in two years. “‘The consumer’s not in the mood to spend,’ said James Luke,
who helps manage $10 billion in assets at BB&T Asset Management, including about
201,400 Wal-Mart shares,” wrote Bloomberg News. May Department Stores Co., the
owner of Lord & Taylor stores, had a 4.7%
December drop. Federated, which owns Macy’s and Bloomingdale’s,
said sales declined 2.6%. Sales fell 2.8% at Neiman
Marcus Group Inc., which offers $550 cashmere robes and $1,100 Escada
crochet knit cardigans. “The season was disappointing even
relative to our cautious expectations,” said Martin Bukoll, an
analyst at Northern Trust Corp., whose $320 billion in assets includes
shares of Wal-Mart.
This is the type of news that many times kills prices in bear markets.
It’s also the type of news that, if the market ignores, usually precedes
major rallies. And on Thursday, the market just shrugged it off.
It didn’t care. It said it was heading higher. And it did. Bond
prices should have soared on this news. They did the opposite. They
collapsed. They did what they should not have done. Now,
let’s look at Friday. The unemployment numbers hit first. Six percent,
just as expected. A nano-second later, the non-farm payroll report
hits. And the news is bad. Very bad. And the futures do a swan dive.
They’re at 929 when the news hits. Seconds later, they are trading at
917. And bonds soar. They did what you would expect them to do.
Now, fast forward 7 1/2 hours later. Nothing has changed in the
economy during these few hours. Yet, stock prices have come all the
way back up and bond prices have come all the way down. Two days
of bad economic news and stock prices are nearly 200 points higher and
bond prices are lower. The market spoke. It said, “Yes, I
know retailing was bad. Yes, I know the economy was
weak. But I’m looking ahead. And from what I see, the worst is over.
And therefore I’m going to rise on Thursday and Friday in anticipation
of this.” It spoke. And it spoke loud and clear.
What Could Go Wrong
Many things. We head into Iraq and they start launching a chemical
attack into Europe. Or we sustain bigger losses than expected. Another
thing would be a terrorist attack. But that threat has been with us
for 1 1/2 years. Or, the economy suffers another set-back, something
that is not out of the question. And there is reality that has to be
taken into account. Barton Biggs pointed out on Friday that no major
bull move has ever occurred with valuations so high. There is also a
lack of obvious leadership out there. All that adds up and it brings
us to the same point where you will be before very major move. And
that’s skepticism. No big up-move has ever occurred when all the
pieces are in place. Because when they are all in place, it’s
too late. Prices will have topped. That’s the way Wall Street
works and it has always worked that way. That’s why it sometimes pays
to simply take a step back and ask yourself, “What is the market telling
me?” And at least for the past two days, it is telling us
it wants to go higher.
What To Play
If you buy into the above scenario, then the answer is easy. It’s
always the same. Kevin Haggerty taught me this four years ago. It’s
the semis and brokers. Economic recoveries are usually
led by technology, and technology is led by the semis. The SMHs
(
SMH |
Quote |
Chart |
News |
PowerRating)
are the safest and most efficient way to play this. No need to get
fancy. They rose nearly 5% Thursday and Friday. Second, if the stock
market rises, which industry will most prosper? The brokers. Goldman
(
GS |
Quote |
Chart |
News |
PowerRating)
is still the leader. And Merrill
(
MER |
Quote |
Chart |
News |
PowerRating) will follow. They both rose
comfortably late in the week. In fact, Goldman rose 4 points in two
days. These stocks lead, not lag. And, if the market is heading
higher, the SMHs, GS and MER will likely rise on a percentage basis
even more.
And, what if we’re wrong? What if the market spoke too soon on
Thursday and Friday? Stops will take you out. There’s pivot
lows from year-end 2002 on all three securities. These pivots are not
too far away, which means the risk is not bad vs. the potential
rewards if we’re right. And the final place to look is the place which
may give you the best risk/reward ratio. It’s simply to short bonds.
They acted horribly on Thursday and Friday and completely the opposite
of the way they should have acted. If the economy heats up, you could
potentially see prices collapse. They have a risk/reward ratio that I
very much like.
What’s New
We have three new things which may be of
interest to you. The first is from Mark
Boucher. Mark’s training module will teach you how to find stocks
that have the potential for substantial 1-6 month gains. Mark is among
the best money managers in the world, and his hedge funds have
consistently been ranked amongst the best in the country Why? Mostly
because of the specific formula he uses to pick stocks both to the
upside and to the downside. If you would like to learn Mark’s
methodology and be trained by him on a bar-by-bar basis, you can find
more information here.
Also, if you trade Fibonaccis and are interested in learning a
specific method to trade them, you’ll want to learn about Derrik
Hobbs’ “Triple Crown Strategy.” Derrik helps run a
successful mutual fund and will soon be a launching a hedge fund. The
main strategy he and his team use to time the entry of their stocks is
their Triple Crown Fibonacci strategy. As you have seen from Derrik’s
column, he has an uncanny ability to pinpoint reversals in stocks and
these reversals often come at an area he calls a “Triple
Crown.” If you’d like details on Derrik’s course, click
here.
On a final note, I’ll be interviewing Louis Navellier for next week’s Big
Saturday Interview. Louis is a stock picker’s delight. He combines
solid fundamental analysis with rapid momentum. His methodology is a
bull market trader’s dream. If we are in fact moving higher, Louis
will likely be amongst the top-performing money managers, and the
timing of this interview could be excellent. It will be published next
Saturday morning.
Finale
Markets talk. And when they do, it pays to listen. If you ask
yourself what the markets said late last week, you have an obvious
answer. They said they want to move higher (and bonds want to move
lower). They said that the economy has likely bottomed and will likely
bounce from here. How big this move will be is anyone’s guess. And, as
I mentioned earlier, it does not mean that it’s going to happen on
Monday or this upcoming week. It simply means the market is ignoring
bad news. And that’s almost always the first sign of higher prices to
come.
Have a great week trading!
Larry Connors and Brice
Wightman