WR: Rally back on?

Weekly Review

It helps to take a step back and look at longer-term charts to see what the market is really up to.  Paying too much attention to the daily noise can be confusing and misleading.  Weekly charts and analysis average out the noise and give a far more clear view of what is going on.

MARKET BEHAVIOR

Markets closed in the green for the second week in a row.  We finished the week up 0.5% on higher volume than the previous week, no doubt helped in part by end of month window-dressing.  While the last few weeks felt dramatic between the post-election selloff and the subsequent rebound, the longer-term charts make it look like a fairly benign pullback to the 200dma.

MARKET SENTIMENT

If this pullback is anything like what we saw this summer, we can expect some daily volatility, but the weekly chart will resume the up-trend.  And this makes a lot of sense if we filter-out all the noise and rationally think about where the market and economy are headed next year.

Discounting the Fiscal Cliff, Euro-Mess, and China, we are left with a slow but stable economic recovery plus corporate profits and balance-sheets that are as good as they have ever been.  Year-over-year numbers are not as eye-popping as they were simply because we are running against tougher comps.  The only reason 2010 and 2011 looked so strong is because the prior years were downright horrible.

The driving force behind this counterintuitive corporate strength is the massive streamlining and cutbacks made during the recession.  Cutting the excess made companies leaner and meaner than they were in boom times, giving them profit margins not seen a couple of years ago.

Looking forward six-months, we have an economy that is still healing and a stock market that is nervous.  That is the exact recipe for a bull market.  We need to doubters for prices to appreciate because when everyone agrees things are great is when we run out of buyers and the market tops.

TRADING OPPORTUNITIES

While we might experience some near-term volatility , the long-term prognosis for the economy and markets is great.  There is so much widespread fear of the stock market that we are likely on the verge of a 15 year bull-market.  Something we’ve seen every time in market history after a decade of stagnant stock prices.  When everyone is pronouncing buy-and-hold is dead is the best time to buy-and-hold.

INDIVIDUAL STOCKS

AAPL is bouncing back from its recent selloff and challenging the 200dma.  Given that AAPL nearly doubled in the twelve months leading up to the September high, a 20% pullback is normal, expected, and healthy.  I have no idea if AAPL can keep up the pace of innovation over the next ten years or not, but it has barely tapped the potential global market for smart phones as the world’s middle class explodes.  Given the huge market opportunity, high profit margins, and very reasonable valuation, there is no reason to expect AAPL will collapse like a bubble stock.

SCORECARD

October 18th, 2012  “Start looking for longs to lock in profits on and watch for weakness to short.  Don’t get in front of this steamroller by trying to pick a top, but if weakness forms, jump on the short and ride it through the 50dma.”

Stay safe