With the S&P 500 up at just under +40% since the March 9th low (+37.35% to be exact), it is worth noting that interest in the goings on in the stocks market 2010 is on the rise. My guess is that the average investor is still mourning the massive hit they took in their 401(k) plans, however those that are paying attention are starting to ask some questions.
In speaking with several different types of investors this week, it became obvious that some of the terms we use to define the environment may be more than a little contradictory. For example, unless you spend your days dealing with the machinations at the corner of Broad and Wall, it makes sense that terms such as "mini bull," "secular bear," and "correction," "pullback," or "pause that refreshes" wouldn't be used in the same sentence.
So this weekend, we thought we'd take a moment to spell out our view on what we see happening in the market these days.
For starters, get out your sharpie and color in a big smiley face on April 28th. The common definition for a bull market includes two variables: percentage gain and elapsed time. According to our favorite keeper of statistics - Ned Davis Research - a bull market is defined as a gain of 30% or more after 50 calendar days. The good news is that Tuesday was the 50th day after the March 9th low and since the Value Line Composite was up more than 30% on that day (53% to be exact), it's official - we've got a cyclical bull market on our hands.
However, this is where some of the confusion begins to come into play. You see, there are two common types of bull and bear markets - cyclical and secular. For experienced market players out there, please forgive me for insulting your intelligence. But, as I mentioned above, based on my conversations with investors over the past couple of weeks, this is an area that needs some clarification.
Think of a secular market move as something that lasts for many years; usually more than ten. For example, the period from 1965(ish) through 1982 was termed a secular bear market. Then we saw a secular bull market from the period beginning in the fall of 1982 and ending in March 2000. And from where we sit, we continue to be in a secular bear market. (The first tip on this score is the fact that as of the end of 2008, the ten-year return for the Lipper Large Cap Growth fund index was -34.27%.)
On the other hand, a cyclical market move - which we prefer to call mini bulls and mini bears - occurs WITHIN a secular move. These moves are much shorter in nature and if memory serves, usually last somewhere in the vicinity of 5 months to a year or so. There are exceptions of course such as the 2003 - 2007 cyclical bull move; but for the most part, a mini move is something that can be valuable to more nimble investors but not so helpful to the buy-and-hold crowd.
So, to clarify, we believe that what we're currently seeing is a mini bull market that exists within the secular bear market that began in 2000.
One of the most important tricks to successful investing is to know and thoroughly understand your time-frames. For starters, you need to quantify what short, intermediate, and long-term mean to you and your portfolio. In addition, it is vital to recognize that the experts you trust may define the "short-term" completely differently than you do or even the next guy on TV.
For example, to a day-trader, the idea of a short-term position may be one that lasts only a few minutes or hours, while the intermediate-term might be defined as sometime before lunch. However, to the institutional investor, the short-term view may be something more along the lines of six months.
So, before we go any further, we'd like to spell out our definitions of the time cycles investors deal with. To be sure, there will be disagreements on this and we are not saying our way is the right way - but these are the definitions we use in our work.
Wiggles and Giggles Moves lasting from one day to a week
Short-Term: Up to three months
Intermediate-Term: Three months to six months
Long-Term: Six months to eighteen months
It is also important to understand that portfolio managers will often allocate portions of their portfolios to different time-frames (as well as different styles). For example, it might make some sense to allocate one half of a portfolio to the long-term cycle using growth stocks for 2010 and then maybe 15% or so to a flexible style that plays the shorter-term moves. We're not saying this is the right thing to do, but it is a fairly common practice these days in the hedge fund community.
From a personal standpoint, I utilize just such a strategy. I have approximately one-third of my personal investments allocated to the 2010 Top Stocks strategy (a more concentrated version, of course), which is designed to play in the intermediate-term world. I have one-third of my portfolio allocated to shorter-term trading in the U.S. market. And I have a third allocated to the intermediate-term via a "go anywhere" global approach. This obviously isn't right for everybody, but I thought it might be a good example of how different strategies and time-frames are used in portfolio construction.
Okay, now let's jump back out of the textbook and back into reality by trying to answer the question: Where are we now?
From a big-picture standpoint, as we've mentioned, we believe that we're in the midst of a multi-year or secular bear market that could go on for several years yet. However, the good news is that we saw a new mini bull market begin on March 10th, which is something that could see gains of 65% to 80% before it's done.
Thus, it is vital to recognize a couple of things. First, the current move is only one-third to maybe one-half over. And second, this is NOT the time to simply set-it-and-forget it. You absolutely, positively MUST be an active manager in the current environment.
From where we sit, the proper game plan is to get invested and ride the current mini bull with at least a portion of your portfolio. We obviously don't know how long the ride will last, but history suggests that there is more upside ahead over the next six months. Yet, we will also suggest that investors have a plan for dealing with the next mini bear, which will likely occur when the anticipated economic recovery runs its course.
We're not saying that you will need to become a day-trader - on the contrary. We're simply suggesting that over the next several years, you can't be a potted plant. No, you will want to have a strategy that allows you to use the mini bulls and mini bears to your advantage.
Turning to the shorter-term time horizon, it is obvious that we've got a strong uptrend on our hands at the moment. However, history tells us the odds favor a pullback after such a strong run and that any upcoming "wiggle" to the downside may not be something to fear. As we've been saying, we will be looking to buy the dips - assuming we ever get one!
( AMZN)
Date Purchased: None Yet
Price: Down to $75
Buy Strategy: Technology took a hit near the end of the week which gave anyone looking to "buy the dip" an opportunity. And while we recognize that Amazon isn't technically a tech stock (the company actually resides in the Consumer Discretionary sector), it has been acting like one and pulled back with the sector. So, we'll be looking to dip a toe into Amazon shortly.
Active Trader Stop: $72.89
MCD (McDonald's Corp.)
Company Profile
Our Success Trading Group members scored another winning trade this week by closing our recently opened position in McDonald's Corp. (Ticker: MCD).
SPIL (Siliconware Precision--$7.28; -0.02; no options): Chip equipment
Company Profile
After Hours: $7.28
EARNINGS: 04/29/2009
STATUS: Test 18 day EMA. SPIL is on its second test of a blast higher that started in early March. Tested in mid-April then took off late in the month. Last week it tested that strong move, coming back to the 18 day EMA (6.98) on the Friday low, then rebounding sharply to close right at the 10 day EMA. That left a nice tight doji with a long tail on the candlestick chart. That indicates a rebound is coming and we are ready to move into SPIL as it continues higher from here.
Volume: 1.371M Avg Volume: 2.405M
BUY POINT: $7.42 Volume=2.6M Target=$8.96 Stop=$6.91
POSITION: - Stock (illiquid option chain)
MTL (Mechel Open Joint Stock Company)
Company Profile
MTL has been showing a number of positive technical signs during its recent trend up. This one could present an entry on a pullback and has a long way to go to reach its split-adjusted highs of nearly $60 last year. $10 Trader is watching for an entry to keep the 2 month winning streak in tact.
APC (Anadarko Petroleum)
Company Profile
The Fed's massive liquidity injection the past 9 months is finally having its impact in the stock market of 2010. When that much money is put into an economy, indeed the world economies, it eventually starts impacting top stocks for 2010. Not necessarily because the economy is taking off; despite what the financial stations are saying the data says it is not taking off, just slowing the plummet toward a second Great Depression. No, a big part of what is happening now is that all of that money is moving into financial markets just to put it somewhere as there is not enough economic activity or stimulus to absorb it. That is what ultimately ignites inflation.
Thus you see top stocks 2010 related to potential inflation starting to take off. Energy stocks of 2010 are some of those top stocks. After moving laterally for a month they set up good patterns and started to breakout. One we were watching was APC in the natural gas area as natural gas prices will rise with the inflation as well. So when we saw it break higher we put it on the report, looking to catch a test of this initial move as we did not get it on the break from the pattern or while it was in the last stage of the base. A test is one of our favorite entry points because it gives us a good entry point after a stock makes its break and it shows us that the buyers still want it, i.e. it is not just going to crash back down on us in a false breakout.
APC surged higher another session but then on Tuesday it tested the move, tapping the 10 day EMA on the low and starting to bounce. The 10 day often acts as a near support level on a breakout, and when we saw that move we entered the stock at $45.64 and bought some August $45 strike call options at $5.10. We wanted some time as these 'reflation' moves can last for a significant period, and moreover the only other option was a June option and that is not enough time to counteract the effects of time decay.
We caught it right because APC started to rally anew the next session, gapping higher and adding $2.78 to $48.26. Gapped again the next session but struggled some, closing off the high for a modest gain. Given the stock had already tested the break higher we were not too worried about that gap to nowhere. Then Friday APC was at it again rallying $3.24 to $51.96, hitting $52.38 on the session high. That put APC at one of its former upper channel lines from the October to January move, and it was our initial target for the move. We banked half of the stock at $52.28, locking in a 14.5% gain. We sold half our option position for $9.50, banking $4.40 per option or 86%.
Strong move in less than a week and APC may retrench some after that move, but with the market in a liquidity mode you can expect more money to come into these areas and top stocks for 2010 such as APC to continue their move higher for now even if the economic recovery theory proves to be wrong given that the inflation seeds being sown are serious.
CCE (Coca-Cola Enterprises, Inc.)
Company Profile
A trade Option Trader closed this past week realized a 38% gain in 4 months. The 2010 best stock is dealing with an area of resistance and a break above could be reason for me to re-enter a LEAPS call position.
PII - Polaris Industries Inc. is currently trading at $35.32. The June $35.00 Calls (PIIFG) are trading at $2.95. That provides a return of about 8% if PII is above $35.00 on expiration Friday in June.
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