Betting on the Bounce!

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
Global stock markets resumed their upward trend this week with the Dow Jones rising 0.58% and the S&P 500 up 0.93%. The MSCI Emerging Markets Index also jumped 1.62%, signaling a return of risk appetite. Stocks achieved solid gains for a second straight session Tuesday, as they continued to recover from last week’s sell-off.

The biggest gainers in your Alpha Investor Letter portfolio included Visa Inc. (V), up 3.23%, and Statoil ASA (STO), up 3.08%.

Other positions that gained at least 2% or more included iShares MSCI Mexico Investable Market Index (EWW), up 2.58%; this month’s recommendation, Vanguard Global ex-U.S. Real Estate Index Fund (VNQI), up 2.48%; the Market Vectors Indonesia Index ETF (IDX), up 2.42%; Apple (AAPL), up 2.19%; and PowerShares Global Listed Private Equity Portfolio ETF (PSP), up 2.01%.

Three positions — iShares Singapore Index ETF (EWS), Statoil ASA (STO) and iShares MSCI South Korea Index Fund ETF (EWY) — moved back above their 50-day moving averages and are now back to a BUY. In addition, I am moving your bet on 3D printing Stratasys (SSYS) off of the watch list and back to BUY, as it has moved back above its 50-day moving average.

So, here’s why I am willing to “bet on the bounce” and remain bullish in the weeks ahead…

First, very recent economic headlines have been mostly positive. Industrial production rose 0.4% in September, beating forecasts and recovering from a decline in August. The homebuilder sentiment index increased to a new six-year high for October. And earnings season has started off on a positive note. Mattel and UnitedHealth posted strong results for the third quarter. Goldman Sachs and Johnson & Johnson both beat Wall Street expectations. The Coca-Cola Co. announced its net income rose 3%.

Second, (and ironically),  corporate CEOs have not been this pessimistic about their companies’ chances for beating earnings estimates since the 2008 crisis. Surprisingly, such pessimism is a  solid contrary indicator. According to a study by www.sentimentrader.com, when CEOs had ratcheted down earnings expectations, the S&P 500 rallied during earnings season 67% of the time. When CEOs had been very optimistic, though, the S&P 500  under-performed. So, pessimism among CEOs actually looks like a positive.

Third, according to my favorite technical indicators, the S&P 500 had not been this oversold since it had bottomed in early June. Such oversold conditions very often lead to strong bounces. In addition, the S&P 500 recently bounced off of its 50-day moving average — always the good sign.

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Finally, Q4 tends to be the strongest quarter of the year — and the time when “risk assets” like emerging markets have done the best historically. That’s also why I’ve also reduced my defensive positions and increased my exposure to stocks in my managed accounts at Global Guru Capital, in anticipation of a continued market rally into the end of the year.

Portfolio Update

MSCI Malaysia Index (EWM) added 0.88% over the past five trading days. EWM will likely make a third visit to a $15 price , and a 52-week high, this week. A break above that level could spell gains ahead. Recent forecasts reflect expected weakness in gross domestic products (GDP) across East Asia. However, Malaysia is the exception,  enjoying a recent upward revision in GDP. EWM is a BUY.

iShares JPMorgan USD Emerg Markets Bond (EMB) rose 1.63%. Sure-and-steady EMB broke out to the upside last week by making an uncharacteristically big price jump — and that’s great news. EMB holds a 4.7% weighting in Venezuelan bonds, which just received a surprising upgrade from JP Morgan to “Overweight,” on the heels of the reelection of Hugo Chavez. EMB is a BUY.

Berkshire Hathaway (BRK-B) gained 0.75%. Berkshire Hathaway’s original Class A shares (BRK-A) are now priced at roughly $132,500 per share. BRK created the Class B (BRK-B) shares so we “common folk” could invest more easily alongside  the famed Mr. Warren Buffett. Wouldn’t it be nice to hold even one BRK-A share in your portfolio? Too bad it no longer costs a mere $9.99 as it did when Buffett started. BRK-B is a BUY.

Visa Inc. (V) jumped 3.23% last week. Visa is back to its $142 resistance level, hitting a 52-week high, for the second time in as many weeks, and appears poised to move higher. V is scheduled to report earnings on Oct. 31. V is a BUY.

The TJX Companies (TJX) lost 3.49% over the past five trading days. TJX continued to cool off from its recent red-hot bull run on an expected post back-to-school dip in sales. Retail market watchers now expect sales to get a post-election boost, and remain strong through the Christmas buying season. TJX is scheduled to report earnings on Nov. 13 and will pay a $0.115 dividend on Nov. 6. TJX is a HOLD.

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iShares Nasdaq Biotechnology (IBB) added 0.71%. IBB includes industry giants Celgene, Gilead Sciences, and Biogen Idec among its top ten holdings. Although this exchange-traded fund has pulled back recently from its 52-week high, shares are up more than 24% year-to-date and appear poised for another leg up. IBB remains a BUY.

WisdomTree Japan SmallCap Dividend ETF (DFJ) gained 0.96% over the past week. Although the consensus risk rating for DFJ is “Low,” among most analysts, DFJ has proven somewhat volatile over recent months, ranging between the $40 and $43 price levels. However, DFJ has been making higher lows on each chart iteration, building upward pricing pressure for this fund. DFJ is a HOLD.

Market Vectors Indonesia Index ETF (IDX) rose 2.42% last week. The Eastern Indonesian Island region had a bit of excitement early last week as a 6.4 magnitude earthquake shook things up. IDX also had its own excitement last week as it pushed through its $29.50 resistance level after visiting it twice before over the past few months. Watch this level in the weeks to come. IDX is a BUY.

PowerShares Global Listed Private Equity Portfolio ETF (PSP) added 2.01%. PSP has formed a convincing short-term base at the $9.40 price level (and 50-day moving average), and launched a small rally. Couple this positive trading action with MarketEdge’s “Long” rating (its highest recommendation), and you have the making of a great buying opportunity and bullish bias going forward. PSP is a BUY.

iShares Singapore Index ETF (EWS) tacked on 1.65% over the past five trading days. Emerging market valuations currently reflect an 11.4 times price-to-earnings ratio, while the S&P 500 comes in at 14 times. This undervaluation should help emerging markets, particularly Singapore, remain attractive to investors, relative to U.S. markets. EWS is a BUY.

Statoil ASA (STO) reversed course to add 3.08% last week. Statoil has likely pulled out of its recent correction after going through several weeks of decline and choppy trading along the 50-day moving average. Yesterday’s positive price action may likely signal the beginning of a move back to its 52-week high, which will be bolstered by Statoil’s recent 571,350-share purchase of STO stock for use in Statoil’s employee share savings plan. Statoil is scheduled to report earnings on Oct. 26. STO is a BUY.

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Lennar Corp (LEN) added 1.30%. According to the National Association of Home Builders/Wells Fargo housing market index, homebuilder sentiment is now at a six-year high. Many homebuilders are taking note of the uptick in “serious” home buyers coming into their show rooms over recent months. LEN paid a $0.04 dividend on Oct. 11. LEN is a BUY.

iShares MSCI South Korea Index Fund ETF (EWY) was flat for the week. Analysts are now reporting that the technical changes coming to the massive $58 billion dollar Vanguard Emerging Markets exchange-traded fund (VWO), and its elimination of South Korean exposure, will have a minimal impact, and not create significant downside pressure on funds such as EWY. EWY is a BUY.

iShares MSCI Mexico Investable Market Index (EWW) regained last week’s lost ground, rising 2.58%. I outlined in detail the case for gains in the Mexican economy in yesterday’s edition of The Global Guru. EWW is a BUY.

Sociedad Quimica y Minera de Chile S.A. (Chemical & Mining Company of Chile) (SQM) held steady last week, dipping just 0.45%, as the after-effects of the failed government-rescinded 20-year lithium contract waned. One analyst put the contract in perspective by pointing out that this was a minor incident in Chile’s mining future, as it has an investment pipeline of $100 billion in total mining projects. SQM is a HOLD.

Vanguard Global ex-U.S. Real Estate Index Fund (VNQI) gained 2.48% over its first week in your portfolio. VNQI has a near-perfect history of respecting the 20-day moving average, going back to June 2012. VNQI’s recent rise from its 20-day MA is likely a sign of a bullish move to come. Our newest pick has a stop price of $47. VNQI is a BUY.

“China Strategy” Legacy Portfolio

Apple (AAPL) gained 2.19% last week. Apple announced yesterday that it would hold a “special event” on Oct. 23 that will likely see the unveiling of its new, smaller iPad (the “iPad Mini”) and new MacBook Pro laptop with “Retina Display.” A look back at AAPL’s trading history reveals recurring bullishness in the weeks prior to these scheduled announcements, as well as actual device launch dates. AAPL may see some significant upside over the next week, as evidenced by yesterdays 2.37% rise. Still trading below its 50-day moving average, AAPL remains a HOLD.

 
 

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