Market Review: Full Steam Ahead

by: Eddy Elfenbein

Next week, the bull market turns two years old. This has probably been the most hated rally in Wall Street history. At nearly every point, some talking head has declared that it’s a bogus rally built on cheap money.

Well … maybe. Still, the market has continued to climb higher and higher and higher. The lesson is that focusing on high-quality companies is much more profitable over the long term than is making broad pronouncements of doom.

Measuring from March 9, 2009 to Thursday, the S&P 500 has gained 96.73% (excluding dividends). That’s not a bad return for five or six years, but for two years -- heavens to murgatroid, it’s pretty darn impressive. As strong as the market’s been, our Buy List has done even better. Over that same period, the Buy List is up an amazing 133.40% (that’s adjusted for rebalancing the Buy List each year).

I recently said to expect a sideways market this spring, and ever since President’s Day, that’s pretty much what we’ve seen. I don’t think we’ll see a major downturn; it will probably be closer to a range-bound market for the next few weeks. On Thursday, the S&P 500 closed at 1,330.97, which is its highest close since the mini sell-off began nearly two weeks ago. This latest swoon may already be over. We’re now less than 0.9% from making a new two-and-a-half year high on the S&P 500.

Let’s look at the positive news: The S&P 500 is still above its 50-day moving average. Historically, the market generally does well as long as we stay above the 50-DMA. On Thursday, the index closed above its 50-DMA for the 126th trading session in a row. That’s a tie for the seventh-longest streak since 1932. The reason the streak has gone on so long isn’t merely due to rising prices; it’s also due to low volatility. Low volatility isn’t a good thing in itself, but it’s a sign that investors aren’t as nervous as they used to be.

The stock market has also risen for both January and February. Historically, that’s a very good sign. Since 1938, the market has risen in both January and February 26 times. Every single time since then, the stock market closed higher for the next 10 months of the year. The record is a perfect 26-0. The average annual gain in those years is 20.73%.

We’re also in the crucial March-April time slot, which has historically been the top-performing two-month period of the year. On average, the market has risen 3.13% over these two months.

Another piece of good news is that the sell-off in the bond market seems to have cooled off. From August to February, the yield on the 30-year Treasury bond rose over 1.3%. That’s a big jump, and those higher yields certainly tempted some stock investors to jump from equities into debt.

Over the past three weeks, however, the yield on the 30-year has slowly climbed down. Please don’t get caught up in the endless screams about the collapse of the dollar or the prospects of hyper-inflation. These are certainly concerns, but as of right now there’s zero evidence that the market is worried about them. Some of these guys you hear know that the crazier and more apocalyptic the predictions they make, the more attention they’ll get.

The U.S. Dollar Index is down, but it’s hardly in free fall. In fact, the Dollar Index is higher than it was three years ago. A good proxy for the market’s view of inflation is the spread between the yield on the 30-year Treasury and the yield on the 30-year TIPs. Right now, the spread is about 2.5%. Historically, inflation hasn’t been a problem for stocks until it’s over 5%.

Since we’ve been focused on a business rebound, our Buy List continues to do very well. Even during this recent turbulence, the Buy List has outperformed the S&P 500 by 0.65% over the last six trading sessions. That may not sound like a lot, but it’s very good for a broadly diversified portfolio. Having said that, let me remind you that it’s very important to be well-diversified in this market. Please make sure a few different industries are represented in your portfolio.

In each issue of CWS Review, I highlight a few Buy List stocks that look especially good at the moment. Last week, I mentioned Stryker (NYSE:SYK) and I’m happy to see that the shares broke out to another two-year high. Stryker is a very solid company and it’s already a 20% winner for us this year. The stock has been on a tear since the company gave very strong guidance for 2011.

Deluxe (NYSE:DLX) is one of the quieter names on this year’s Buy List, but don’t be fooled; it’s doing very well (+14.81% YTD). DLX hit a new 52-week high on Thursday as did Reynolds American (NYSE:RAI). Jos. A Bank Clothiers (NASDAQ:JOSB) is looking like it might be the next stock to break out.

Oracle (NYSE:ORCL) also looks very good at this price. The company will release its next earnings report on March 24. Wall Street’s current consensus is for 49 cents per share. I haven’t finalized my number-crunching, but I suspect that Oracle’s earnings will come in higher than that. Actually, it might be a lot higher. ORCL is a strong buy below $35.

Finally, Abbott Labs (NYSE:ABT) is also pretty inexpensive here. The dividend currently yields 4% which is more than a 10-year Treasury bond. In January, Abbott gave full-year guidance of $4.54 to $4.64 per share. That’s impressive growth over 2010′s EPS of $4.17. (The U.S. Treasury isn’t growing its profits like that!) I’m not sure why ABT hasn’t responded more favorably. Perhaps it will soon. Either way, ABT is a very good buy below $50 per share.

Let me caution you not to be impressed by the recent rally in gold. The fundamentals are clearly on gold’s side, meaning low real interest rates. The problem is that I don’t believe it’s a lock that those low rates will stay for a long time. It could happen, but the Fed can call off the party at any time. It’s not a risk worth taking.