A couple of weeks ago, while we were testing SP 1242, I raised my objective on the S&P 500 from my previous long term call for 1600 to a new target of 2000. However, I pointed out some short term negatives. Some were visible, some were hidden - very large drops in "secondary" stocks, with no reason really, churning at a top, overall uneasiness, the impending "flying blind" IMF Meeting, earnings season. What I did not expect was the worse, and it happened. I won't speak about this here, as it would be inappropriate and pure conspiracy theory, but I cannot help but notice the correlation between the current market rally and the progress we made to end the short term madness.
What I am factually impressed by is the overall market reaction to earnings. Sure, IBM (IBM) was noticeably down, and Microsoft (MSFT) noticeably up, but here again I am more talking about the "secondary" stocks, the ones I dab in. Woodward (WWD) today kind of guided down - stock is up 3%. United Rentals (URI) was up 6% intraday last week, Valmont (VMI) was up 6% intraday, Veeco (VECO) is up 16% today, and even Sanmina (SANM) is up 12% - not to mention the whole Homebuilding Sector, with my favorites Toll Brothers (TOL) up 9% as we speak (10:00 am EST), and Pulte Group (PHM) up 6%.
So, while we have had plenty of reasons to break various support levels in the past couple of weeks - and we almost did, at times, in an otherwise very volatile market - the fact is we did not. What this has created is another Wall of Worry, which is one of the thingies that I felt was missing at the end of March. And my bellwethers have continued to give me the cue: the High Yield Corporate IBOXX (HYG) is at a new high today, and barely bulged through this tempest - and while Fiat (FIATY.PK) has pretty well correlated, it too is running back up.
Now, since I gave you all my favorite charts in the last article, I will not update them here. What I have updated is my Dow Model. I alluded to it last time, but here is how it looks as of last night's close, April 22 (note: this was prepared at 9:00 EST on April 23, before the market open):
Basically, the momentum is on the way up, with the two coefficients (the orange box) at 1.90 for the Exponential Moving Average Convergence and at 2.30 for our Proprietary RSI Oscillator - both on a scale of 1 to 4, 1 being a potential bottom, 3 a potential top. As I mentioned last week, and now you have the whole picture in the last column to the right, the standard deviation of relative performance is huge, at 13% or so, for an index which has returned 11% since our last publication on August 24, 2013 (price only). Ten stocks have had a positive relative performance greater than 10%: in that order, Verizon (VZ), Procter & Gamble (PG), Boeing (BA), Johnson & Johnson (JNJ), Disney (DIS), JPMorgan (JPM), Pfizer (PFE), Home Depot (HD) - and the big winner is, Bank of America (BAC)... And there were seven stocks with a relative performance lower than 10%: Microsoft (MSFT), Dupont (DD), Exxon Mobil (XOM), Caterpillar (CAT), International Business Machines, Alcoa (AA) - and the big loser is Intel (INTC).
If I have to venture yet another guess here, this wave should take us to Dow 15000 (DJI) and S&P 1600 - finally -, with little need to pick stocks. That's another 3% or so, no big deal and could happen fairly quickly given the remanence of pessimism out there. Then, the real game begins - while I expect we will reach 2000, the standard deviation of individual returns will continue to be large. In plain English, stock picking will be back in order. Might as well start now.
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