Today's Market Strength. This market has been very forgiving, edging up so cautiously, as if tip-toeing around a much-touted correction. Compared to ten years ago, we have had such a broad-based rally. It's not all about technology, but tech stocks have shown incredible strength. Bernanke has been quite outspoken recently that the financial market can give the economy a boost and in turn help the employment situation.
As if to emphasize that caution, Steve Jobs taking medical leave again apparently caused the stock index futures to take a dive. Will we have another gap down reversal like last week, or will Mr. Jobs health affect the overall health of the market? Seems like a silly question, but apparently the bears will use any excuse, and then the bulls immediately start buying the micro-dip. Apple (AAPL) shares sold off 7% in Europe Monday while our markets are closed.
The Market Gives, and the Market Taketh Away. I remember 1999 like it was yesterday. Qualcomm (QCOM) was the best performing stock in one of the best performing years in stock market history. Lots of short term riches were made, and in some cases lost by greed or ignorance or both.
Investors and traders got rich if they took their profits. However, I heard many frightening stories of those who finished deep in debt because they kept buying the dips during and after the bubbly blow-off. Not only that, but many of them bought the dips on margin and went from being up a few million American dollars to being in debt to their broker, and in debt to the IRS.
If a trader made money in 1999 with large capital gains, and then had no money to pay the IRS by April because the Nasdaq started to crash in March 2000, then that trader would be in a tough spot. Sell rules are just as important as buy rules.
How Different from A.D. 2000. In 1999, and especially into the first quarter of the year 2000, it seemed like the more the Nasdaq went up to astronomical levels, the more people began to doubt the investing genius of Warren Buffett. So many became absolutely arrogant, throwing insults and statements of pity at the Oracle of Omaha. Just like in 1929 when an eminent Yale economist, Irving Fisher, actually said that the market had reached a “new permanently high plateau,” people were saying that Warren just didn't get it, and that we were in a “new paradigm,” or a “new normal.”
See the chart below of the popularity of these two terms in published books over the past 110 years as captured and graphed by Google Labs Ngrams.
click to enlarge images
For over two years we have seen retail investors pile into Treasury, municipal, and corporate bonds, but especially Treasury bonds to the point, seemingly, of a bond bubble. Now, all of a sudden (it seems) they are saying that too many investors and newsletter writers are bullish.
In only one quarter, actually it's probably more like one month (December 2010 was perhaps the turning point) we had a shift from investors continuing to be afraid of the stock market...to being too bullish. There are several points in stock market history when bullish investment advisers were too plentiful, such as in 2003, and this continued for months, and many missed the rally. The last 10 years have produced many doubters, and for good reason.
Broad-Based Buying. What I'm seeing now is actually quite amazing. Over the past month, I have witnessed buying coming into so many sectors, rotating from one sector to another almost on a daily basis. Many industry groups within technology have experienced significant amounts of buying like IDCC, IDT, NVLS (on Friday), and our old friendQCOM. AAPL, GOOG, and EBAY are due to report earnings this week, and have also been quite bullish.
And yet with all that technology buying, the financial sector was the best performing on Friday, for the week, and even for the past month. Wells Fargo Bank (WFC) is one of the largest holdings in the Berkshire portfolio (the historical concentration has been in financial companies), and it looks to be coiled for a big move (see chart below). The action of Berkshire Hathaway stock (BRK.A and BRK.B shares) looks ready for a big move (see chart below).
Of course, it may seem rather absurd applying any sort of technical analysis to Berkshire Hathaway charts. If you're buying the "A" shares which are trading for $122,474 per share, you would probably want a good entry point.
We have been buying Citigroup (C) for over a year and Bank of America (BAC) for the past month, adding to it last week. J.P. Morgan Chase (JPM) has shown surprising strength before and after earnings last week. Citigroup (C), Morgan Stanley (MS), Bank of America (BAC), Wells Fargo (WFC) and Goldman Sachs (GS) report earnings this week. JPM's earnings release on Friday gave good reason to believe earnings in other bank stocks will be good. The financials (especially banks) are expected to show very high growth rates largely because of easy year-ago comparisons. However, JPM will be a tough act to follow for the other banks.
Stocks With Potentially Pre-Explosive Moves
I have seen buying in WYNN (expect a 600% profit surge for the fourth quarter), which looks ready for a bullish continuation move out of a bull flag. See also CWEI (other bullish stocks in the group with good fundamentals are CXO, NOG, GEOI), PRGO (and IPXL in the group), AKAM(ARUN, FFIV, LOGM, RAX in the group), LEA (AXL, TEN, GNTX, MGA),PCLN (TZOO and EXPE – these all have amazing patterns, and the latter two are much lower in price if that makes you more comfortable).
Perfect Storm Not Limited to Finance and Tech. My recent article onJOYG (published 12-14-2010) just before earnings proved to be worth the research, and we are up over 15% in a little over a month (this is the third largest holding in our portfolio). JOYG also had some nice buying come in on Friday. Our largest position (which keeps getting larger) by far is POT, and it has held up remarkably well. I would refer you to the January 13, 2011 article in the Investor's Business Daily on the “Perfect Storm” for agriculture stocks which was published last week. This article noted AGU to be particularly attractive. Also, last week the Department of Agriculture's crop report sent grain prices up, helped also by floods in Australia and drought in Argentina.
Conclusion
The so-called perfect storm in agriculture related stocks leaves me pondering: There has been so much buying in both technology and financial stocks (regional and money center banks, mortgage insurance, even housing stocks) and yet a completely unrelated area has been referred to as the “perfect storm.” Could be a generational alignment that could last two or more years. Many money managers are skeptical of this rally, but they have been buying anyway.
The kind of end-of-year “drifting up” behavior in the market has not been seen for 110 years, according to Investor's Business Daily research. So many money managers were expecting, almost with certainty, a correction in early to mid January. The longer that correction doesn't materialize, the more they worry that they are getting behind the curve and missing the move. Qualcomm (QCOM) is strong again, trending up since July 2010 from below 35 to 52 on Friday's close. But technology stocks are almost like a side note in today's environment compared to the Technology Bubble of 2000.
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