It was a big week for the stock market last week, with the Nasdaq shooting up 7.6% — its best gain since a 10.6% gain in the week ended March 13, 2009. The S&P 500 climbed 6% and the Dow Jones industrial average jumped 4.9%. The S&P has now enjoyed a 10% rally over the past two weeks, with no -1% down days, coming off of a 52-week low.
After such a strong performance, it would be reasonable to expect a pullback. And trading right near the 1,220 level on the S&P 500, the U.S. market is just at such a crucial resistance point. If it pulls back this week, then we’re still locked in the same trading range that we’ve been in since early August. However, if the S&P 500 climbs beyond the 1,220 level, then it’s “off to the races” and you can expect a traditional Q4 rally. It’s a drama that will be resolved soon.
This week’s Bull Market Alert recommendation stays away from stocks altogether and, instead, focuses on a completely different asset class — “livestock” — through the iPath DJ-UBS Livestock TR Sub-Idx ETN (COW). This exchange-traded note (ETN) tracks the price movements of cattle and hogs through the performance of the Dow Jones-UBS Livestock Total Return Sub-Index.
One of the challenges of trading in today’s environment is that it’s a “risk on,” “risk off” world. One week, everything goes up. The next week, everything goes down. As the cover of The Economist magazine put it this week, there is “no where to hide… during times of crisis.”
Livestock may be the exception as it remains one of the few asset classes that sings to its own tune. And when you think about it, that makes sense. The performance of COW is linked 63.69% to the price of live cattle and 36.31% to lean hogs. It’d be hard to find a connection between, say, the price of Apple stock and farm animals designated for slaughter.
The fundamental case for investing in cattle is compelling both because of contracting supply and exploding demand. Cattle futures recently hit highs this past month on signs that supplies are shrinking as ranchers reduce the size of their herds. The cattle herd in the United States totaled 100-million head on July 1, the lowest for that date since at least 1973. Texas cattle ranchers are expected to cull the most breeding cows ever this year as the worst drought in Texas history has forced them to shrink livestock herds rather than incur higher costs to buy feed grain. As a result, retail-beef prices will rise by as much as 9% this year, more than any other major food group.
Meanwhile, demand for beef from Asia is exploding. Beef exports this year through August were already up 27% and last week’s approval of three U.S. free-trade agreements with South Korea, Colombia and Panama will only boost sales further. The U.S. Meat Export Federation expects beef shipments to climb by about $517 million, or 13%, over the next 15 years as duties on U.S. shipments are phased out.
So buy the iPath DJ-UBS Livestock TR Sub-Idx ETN (COW) at market today, and place your stop at $29.00. If you want to buy the options, I recommend the January $31 calls (COW120121C00031000). Full disclosure, I own COW for my clients at Global Guru Capital.
Portfolio Update
Alexion Pharmaceuticals (ALXN) rose 2.49% for the week. ALXN ranks third in the biotechnology sector for projected earnings growth — the primary component buyers pay for when purchasing any stock and what largely drives prices higher. ALXN reports earnings this Thursday, Oct. 20. ALXN is currently a BUY.
Bank of Ireland (IRE) dropped 8.79% for the week. France and Germany finally elevated European bank recapitalization as a priority early last week. Positive momentum is starting to build as the critical issues to recovery are beginning to be addressed in a productive manner. In addition, the Bank of Ireland carried out a 1-for-10 reverse split that took effect after the close of trading Friday. The intent of such a reverse stock split is to raise the price of the stock 10 times higher than its previous level, which had slipped below $1 a share. IRE is currently a HOLD.
National Bank of Greece SA (NBG) ended the week unchanged. Benzinga.com reported that Greek and European banks can tolerate write-downs of up to 30% on their debt. This adds further credence to the belief that banks can and will be saved. Once authorities finally “get it right,” NBG should be in for a sharp and sustained upwards move. NBG is a HOLD.
Spreadtrum Communications, Inc. (SPRD) skyrocketed 14.52% last week. SPRD recently tumbled from its highly significant $22.00 resistance price level. However, SPRD recently vaulted off of its 50-day moving average and attained $22.00 once again. This is a strong indicator that SPRD can break this resistance level and continue its upward climb. SPRD will report earnings in one month. Above its 50-day moving average, SPRD is a BUY.
ProShares UltraShort MSCI Emerging Mkts (EEV) fell 16.23% over the last five trading days. Last week marked the second week of market gains, sending EEV below its 50-day moving average. As a “hedge” position, the role of this position is to zig when the rest of the position zags. Its current negative performance means the broader portfolio is doing well and making gains. EEV is currently a HOLD.
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