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our friends over at Wealthbuilder have sent us this stock market update
Market Brief November 2010
The market continues to power ahead with significant momentum. The Dow 30 Industrials,
the Dow 20 Transports, the S & P 500 and the NASDAQ 100 all are taking wind from a new
quantitative easing policy, extended Bush tax breaks and positive earnings guidance. In addition
Wall Street likes the idea that Democrats and Republicans must work together and compromise
following the mid-term Congressional elections.
There is of course another factor influencing the positive trend. Given that current interest
rates are near zero the only way bond rates can go is up. Rising rates will herald an end to the
extended bond market rally we have witnessed over the past years. Smart hedge managers
are reading the change and are moving ahead of more cautious mutual fund players. Should
this capital re-allocation strategy become more pronounced, good times could finally arrive to
beleaguered equity managers. Remember the stock market has ambled range bound since 2001.
It is thus well in line for major price movement particularly when you factor in the inflation
multiples which will eventually kick in to common price levels as a result of quantitative easing
dollars moving out from financial balance sheets and into the broader economy.
Since September our recommendations have done fabulously well. Silver (SLV) is up 36%,
Gold (GLD) has gained 10% and our emerging markets ETF (EDC) has advanced 70%.
Long may it last. I recommend sticking with these momentum trades until their 20 DMA’s are
significantly broken on large volume. I do not believe we will see that soon. If anything I reckon
those investors who are out of the market may find it difficult to find a safe entry point until the
earnings season in early 2011. But traders should not be disheartened. The market eventually
always retrenches. I am a great believer in waiting for a technically sound purchasing position.
Patience will always outlast recklessness. In other words never chase “Mr. Market.” For those
who are looking for an investment “target” that has not run too far from a conservative technical
range I recommend consideration of USO, the oil investment vehicle. This ETF is significantly
off its 2008 high of 103. It currently trades around 39.50. Should it break the 41 dollar level
it will be a definite buy and could go all the way to 120, in 2011 and beyond, should the bull
perception begin to consolidate.
On the value front there have been great results from our watch-list candidates. To name a few:
Western Digital (WDC) is up 41%. Monsanto (MON) has risen 29%. The Blackstone Group
(BX) has gained 40%. Southern Copper (SCCO), a company that actually pays a fantastic
dividend, has increased 50% and Telefonica (TEF) has advanced 35%.
Observing price action broadly across the market-place the message I am getting is that the
worst is over, short term, and that the bull trend is growing in energy and power. Extended and
compressed high stochastics are a feature of bull markets and that is what we are experiencing.
The final leg to the “Bull” stool would be for the bottom to be finally set for the Real Estate
market. My property contacts in Florida tell me this may not happen too soon given the
complexity of the crisis but the current “mixed” real estate story has a silver lining. The FED
will not raise interest rates aggressively until bank balance sheets have stable “mark-to-market”
property valuations. When that happens stock market advances will begin to be tempered by
rising interest rate trends, but we are not there yet. Thus as long as monetary policy continues to
be accommodative I see no reason why Wall Street will not enjoy a traditional “happy” festive
season and a New Year that beckons “new hope” and higher prices. Thus the traders mantra will
not be “buy low and sell high” but “buy high and sell higher.” The wall of worry has arrived.
The easy money has been made. It’s time for the seasoned traders who understand technical
positioning to rule the roost and make some real money going long on appropriate risk reward
candidates. Fundamentals are fine but always remember that technicals rule.
Christopher M. Quigley
B. Sc., M.M.I.I., M.A.