Everywhere you turn you can hear people telling you why you need to be careful and that you shouldn't be optimistic about the future. In short, since we've just completed one of the worst bear markets in a generation - a bear that took the Dow down -53.8% from its October 9, 2007 high and pushed the S&P 500 to a loss of -56.78% - it is hard to take a stand and say "it's over."
You see, everybody who has studied history to any degree knows that the lows of a bear market are often "retested." During this "retest" phase, fear tends to return in earnest and it usually feels like we're returning to the bad old days of pain and misery.
While anyone calling for a new bull market, regardless of whether they are using the term mini, cyclical, or secular, will tend to look dumb during the retest phase, we want you all to know that it is during this part of the cycle that you have to forget about looking and feeling dumb and start buying - if you haven't done so already. Because, the bottom line folks, is that the retest phase is also called the "second chance buy."
Before we go any farther, we should once again point out that we believe this will prove to be a "mini bull" that is likely to last somewhere in the range of many months to a year, and not a secular bull that could last 10 years or more.
Our thinking is that the consumer has seen their net worth take a massive hit. We've all heard the 201(K) jokes and everybody knows that their house isn't worth what it used to be. In addition, debt is once again a four-letter word. Because of this, we don't see the consumer returning to the days of easy spending any time soon.
It would also be logical to assume that with the baby boomers trying to retire and younger consumers trying to pay down their credit cards, more money is likely to go towards savings and there will less discretionary spending. Thus, the economic recovery is probably going to be weaker than what we've seen in the last 20 years.
In looking at the big picture, the Dow is now back to where it was at the lows of October and, excluding two days, November. Thus, we can say that the recent six-week rally has simply undone the negative discounting that was applied during January and February. From where we sit, this means that there is plenty of upside "discounting" that is still available as the economy begins to recover.
The point is that while the "easy money" has been made over the last 6 weeks, there is likely to be some serious upside left in this mini bull. Remember, according to Ned Davis Research, the average "cyclical bull within a secular bear" sees gains of +65% and lasts more than a year and a half.
You may also recall from our previous reports that the majority of the gains occur in the first one-half of the time. And it is for this reason that we would embrace a retest of the lows in the near future. In short, any move back toward the lows effectively presents more upside opportunity for buyers.
It is also important to note that from an historical standpoint after the bulls begin to romp, the market has been higher 3, 6, 9, and 12 months later - without exception. So, hopefully this explains why we've been pounding the table about the idea of "buying the dips."
One of the biggest lessons I've learned in my investment career is that leadership changes when the market makes a costume change. In other words, the areas that are leaders during bear markets are NOT the leaders of a new bull market. Thus, you've got to make a change in your thinking right about now.
So, where should we be looking to invest these day? While it may be hard to do, we're here to say that it is time to think more aggressively. Think about areas that have higher betas. Think about the stuff that typically provides the best returns during bull markets. In short, think small caps, technology, financials, and the emerging markets.
While it may sound counterintuitive to our discussion about the future of the economy, you can also think about the consumer discretionary area. Although we don't expect the consumer to be "big spenders" going forward, remember that this is an area that was beaten down during the bear as traders discounted the idea of the consumer going into hiding during the recession.
Next, although it may be hard to do at this time, in terms of betting on the eventual economic recovery, you will want to look at the energy and materials sectors.
Finally, please know that we are absolutely, positively NOT suggesting that you run out and bomb into top stocks right this very minute. No, we think a "buy the dips" approach makes a lot more sense from a tactical standpoint. And since the market typically experiences a retest phase, you might want to get ready to pounce if/when we see stocks pull back.
For those that do not have any money invested in top stocks of 2010 right now, we understand that it is tough to buy after a +28% run off the bottom. However, as we pointed out, the Dow is basically sitting where it was last October. So, if you think this run has farther to go before we see a pullback (a 50/50 proposition in our opinion) then getting a "starter position" established could be considered an appropriate strategy.
On that note, let's keep in mind that although we've had a very nice rally over the last six weeks, the Dow needs to gain +74.2% from here in order to return to its high and the S&P 500 will need a rally of +80%. Thus, there is still some upside left from a big-picture standpoint.
As for our portfolios, we are currently enjoying the ride and are anxiously awaiting a pullback to get more invested.
STOCK SPLIT REPORT -- by StockSplits.net Editor Jon Johnson
For post-splits, we can play them as we would pre-splits (very short term), but we prefer to stretch our horizons, playing the trend. When playing options, we look further out, 2 or more months at least. We let the trend carry us along if there is one, but we will also take profits if the technical pattern degenerates, e.g., breaks a trendline. The main difference between post-splits and pre-splits plays is that we really have to like the pattern. Pre-splits can run right before their splits even with poor technical indicators. For post-splits, we are looking at the top stocks for 2010 from more of a longer term "would I buy this stock at this juncture?" position. Now there are times when a hot stock splits and investors pile in to get in while the stock is 'cheaper.' We play those, but with more of a short-term, pre-splits mentality in that we will be ready to get out fast if the momentum fades.
Remember, everything we do has to pass muster with the market that day ... don't fight the market on these plays.
Listen to Stock Split Report Editor Jon Johnson's
stock split interview on CNBC-TV
Here's a post-split play and our current analysis.
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NVDA (Nvidia--$11.43; +0.26; optionable): Graphics chips
Company Profile
After Hours: $11.50
EARNINGS: 05/07/2009
STATUS: Flat. Came to life in March, and after consolidating that gain it bolted higher again in early February, rallying to 12. It has come back the past two weeks to test the 18 day EMA (11.09), forming a flag to the nice early April flagpole. A great setup to make a new break higher and rally up toward the August 2008 peak. After that there is that gap lower from up near 18, but we will take it one step at a time; the move to our initial target lands us a nice gain.
Volume: 18.988M Avg Volume: 22.095M
BUY POINT: $11.71 Volume=26M Target=$13.95 Stop=$10.68
POSITION: UVA IK - Sept. $11c (63 delta) &/or Stock
APOL (Apollo Group, Inc.)
Company Profile
Even as the market has trended higher the action has turned choppier and with that there have been some spectacular collapses. We made a lot of money off the private education and training sector when it rallied higher. It rallied in the last recession and we were in on ESI, a leader in the sector, when it took off. They tend to run and then burn out, and when they burn out the collapse can be dramatic.
We watched APOL start the self destruction process and on 4-18-09 put it on the report as it showed a tight hammer doji at the 18 day EMA and just below the 200 day SMA after a low volume four day rebound from the collapse below the 200 day SMA to end the first week of April. That is a prime flag that a move is out of gas and ready to turn the other way. The next session APOL started lower off that doji and we moved in with some May $65 strike put options as the top stocks was trading just over $65. The delta was lower but the price was right ($3.60) and would give us a good return if APOL tumbled as we expected. As a bonus, earnings were out after hours that session, and when a sector starts this kind of collapse virtually nothing will stop it.
Sure enough APOL gapped lower the next session to $61.74 and then selling further to $59.85 on the low. Now we could have hung around and see what the next days would bring, but this was the move we wanted as it sold off and tested the prior April low. Our options were bidding $6.20, a $2.60 gain per option or 72.2%. With that gain in hand in less than a day we took it. Never looked back, but we will see if APOL sets up for another downside play.
RSH (RadioShack Corp.)
Company Profile
Movement in RSH enabled me to first buy some LEAPS calls then reduce my cost by selling other calls to create a spread that I ultimately closed during the week for a 20% return after commission in just over a month. The stock now has to contend with some overhead resistance if it is to continue trending higher.
BARE (Bare Escentuals, Inc.)
Company Profile
After breaking out of a modified cup and handle and breaking resistance both at the $4 and $5.50 levels, BARE has continued to glisten. I'm looking for entries on dips and see a target in the $19+ range.
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