Markets Stumbling Along… Rally Ahead?

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
Overall, it was a negative week in global stock markets. The Dow Jones was down 2.36%, the S&P 500 fell back 2.80% and the NASDAQ dropped 2.58%. Global markets fared even worse with the MSCI Emerging Markets Index (MCSI) tumbling 5.77%.
Your Alpha Investor Letter portfolio held up reasonably well, with the iShares JPMorgan USD Emerg Markets Bond (EMB), The TJX Companies (TJX), and iShares Nasdaq Biotechnology (IBB) essentially flat for the week.
Global markets continued their weakness as the MSCI Malaysia Index (EWM) and iShares JPMorgan USD Emerg Markets Bond (EMB) dropped below their 50-day moving averages. EWM moved to a HOLD but EMB recovered to advance above its 50-day moving average and is a BUY. Stratasys, Inc. (SSYS), always a volatile stock, dropped 6.33% and moved to a HOLD, as well.
As you know, I am big fan of monitoring — and betting against — consumer sentiment. Last October, when consumer sentiment hit one of its lowest levels in 40 years, I predicted that, based on history, the stock market would rally sharply over the next 12 months. Sure enough, the market rallied about 20% through the end of February.
Well, the latest Consumer Confidence Index data confirmed that investors are again down in the dumps. The percentage of investors expecting stock prices to rise going forward has dropped below 24%. That is a remarkably rare occurrence.
Take a step back, and that level of pessimism is surprising. After all, we did not endure as sharp a sell-off in the markets as we did last August. In fact, the S&P 500 is just 6.5% off of its recent highs in March. And many broad U.S. averages are still holding above their 200-day moving averages. Things feel a lot worse than they are.
As points out, the only other times investors felt this pessimistic about stocks in the past 25 years were March 2003, for most of the period from early 2008 through early 2009, then again in July 2010 and August 2011. The stretch from early 2008-2009 was obviously a good time for consumers to be wary of stocks’ future prospects.
But the six months following these occurrences, the S&P rose at least +12%. Similar gains this time would push the Dow over 14,000 by end of September. Throw in the prospects of a business-friendly presidency in the United States and Dow climbing to 15,000 is well within reach by the end of October.
The challenge is that the market is still held hostage to headlines from Europe and a slowing global economy. And it is unclear how the U.S. market will react to the Supreme Court’s ruling on Obamacare. There’s little doubt that cutting back in Obamacare’s requirements would put a spring in small business’ step. That said, the real question will remain what general direction the United States will take in 2013 and beyond. And that won’t become clear until November.

Portfolio Update

MSCI Malaysia Index (EWM) lost 2.60% last week, erasing the previous week’s gains. Emerging markets have endured a difficult week and EWM has suffered accordingly. However, EWM has been a strong relative performer in the Southeast Asia region, handily beating the performance of other ETFs tracking Indonesia, Thailand and Vietnam. EWM moved back to a HOLD.
iShares JPMorgan USD Emerg Markets Bond (EMB) was essentially flat for the week, dipping just 0.37%. EMB is taking a breather after reaching the significant $114.25 resistance level — a level tested twice since early March. EMB may challenge this resistance level over the coming weeks, and a break above it could result in significant future gains. EMB is a BUY.
Berkshire Hathaway (BRK-B) lost 1.99% over the past five trading days. World Media Enterprises, Inc., a subsidiary of Berkshire Hathaway, Inc., completed its purchase of Media General, Inc. on Monday for $142 million. This deal included 63 daily and weekly newspapers. BRK-B is a BUY.
Visa Inc. (V) rose 1.49% over the week. Visa Europe, a European licensee of Visa Inc., has been in weekly discussions with other major European companies to create a disaster plan in case of a breakdown of the euro currency. One company executive remarked on Visa’s ability to “implement new currencies at the drop of a hat” by allowing people to use their credit cards as a payment mechanism in the event of a collapse. Should this scenario actually play out, the transactional revenue boost to Visa would be astronomical. V is a BUY.
Yum! Brands, Inc. (YUM) lost 2.66%. Zacks Equity Research recently highlighted YUM as one of the companies taking full advantage of the positive future in the global restaurant sector. News in the United States has also been positive. The National Restaurant Association’s “Restaurant Performance Index (RPI)” recently posted a strong 101.6 score (anything above 100 denotes growth) in same-store sales and customer traffic metrics. YUM is a HOLD.
The TJX Companies (TJX) dipped 0.90% over the previous week. TJX reported that its May sales figures were up a full 10% from the same period last year to $1.9 billion in sales. This may be due in part to the significant national dip in gasoline prices. TJX is a BUY.
Stratasys, Inc. (SSYS) lost 6.33% last week. SSYS has been holding the $43.80 support level the past two sessions, and has tested it three times during the month of June. This normally signals a solid support level for a stock price. SSYS is a HOLD.
iShares Nasdaq Biotechnology (IBB) came in flat for the week. IBB took a breather this week, moving sideways even as broader markets fell appreciably. Such a consolidation phase normally indicates that IBB is preparing for its next leg up. Couple this with the recent breech of the $126.50 resistance level and a new 52-week high, and IBB’s future looks quite positive. IBB is a BUY.

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