The Market Finally Breaks out

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
After being locked in a trading range reaching back to early August, the S&P 500 Index finally broke through the 1,230 resistance level. That said, the U.S. market pulled back to just that level yesterday, ending the week up only slightly. The MSCI Emerging Markets Index fared only a bit better on the week.

We are now firmly into Q4 — the quarter in which global markets traditionally perform best. And what a quarter it has been. Since bottoming on Oct. 3, global stock markets have shot straight up. The S&P 500 is up 8.75% and the MSCI Emerging Markets Index has risen 12.76%. Earnings reports have been overall positive, even in the face of a slowdown in the global economy. Yesterday’s sharp drop confirmed, however, that the market is still vulnerable to negative news surrounding the resolution of the European debt crisis.

Your Alpha Investor Letter portfolio ended the week mixed. Your position in MSCI South Korea Index (EWY) posted a 2.49% gain last week. Your other positions pulled back as investors reacted negatively to the news in Europe and took profits from the recent three-week rally.

However, there are reasons to be bullish over the longer term, based on an interesting bit of information that I came across on sentimentrader.com.

The Conference Board’s preliminary survey of consumer confidence came out yesterday at 39.8, posting one of the worst results in the survey’s 40-plus year history. U.S. consumers last felt this lousy in March of 2009, right at the market’s bottom.

Ironically, that’s good news for stocks. One year after reporting a survey reading at or below 50%, the return on the S&P 500 was positive 100% of the time. Moreover, this remarkable pattern has occurred 18 times in the past. The average return was 22.9%, with a maximum average decline of 4.1% during the year, as compared to a maximum gain of 25.6%. When consumers get this down, it’s been good news for stocks, without exception.

Exclusive  Closing a Very Strong Q1 for The Alpha Investor Letter

Based on our 50-day moving average rule, I am recommending that you re-enter several of the positions on your Watch List. These include:

Indonesia Index ETF (IDX); set your stop price at $23.00.

iShares JPMorgan USD Emerging Markets Bond (EMB); set your stop price at $103.00.
First Trust NYSE Arca Biotech Index (FBT); set your stop price at $30.00.
Market Vectors Russia ETF (RSX); set your stop price at $22.00.

There are several other positions on your Watch List flirting with the 50-day moving average level. I expect more recommendations, if market conditions remain positive.

Portfolio Update

WisdomTree Japan SmallCap Dividend Fund (DFJ) dipped 1.91% for the week. DFJ is testing its $42.50 price level for a third time in as many weeks. Japan recently reported positive export figures for a second consecutive month. This report comes on the heels of a five-month losing streak that began with the March 2011 earthquake and tsunami. DFJ breeched its 50-day moving average yesterday and is now a HOLD.
 
Las Vegas Sands Corp. (LVS) fell 7.01% over the past week as investors positioned for its Oct. 27 earnings report. Analyst estimates are $0.52 per share on $2.34 billion in revenue. Deutsche Bank recently recommended buying shares on any dips. LVS is currently a HOLD.
 
ProShares UltraShort FTSE China 25 (FXP) gave back 5.17% last week. However, with Gross Domestic Product (GDP) growth slowing and inflation continuing to rise, the China bull continues to show signs of fatigue. FXP is currently a HOLD.
 
MSCI South Korea Index (EWY) rose 2.49%. Emerging market exchange-traded funds (ETFs) began their seasonal rise once again, as if on cue, and EWY has followed right along. After taking a short breather on its 50-day moving average, EWY is continuing its move upward. EWY is a BUY.
 
MSCI Malaysia Index (EWM) lost 1.26% during the past five trading days. EWM is moving up nicely as it participates in the emerging markets rally. The Malaysian Institute of Economic Research (MIER) recently pegged Malaysia’s growth rate at 4.6% year-over-year and estimates a rise to 5.0% for 2012. EWM is a BUY as it rests on its 50-day moving average and readies for its next move.
 

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As often happens in Q4, global financial markets have regained their mojo. The Dow gained 1.4%, scoring its fourth straight up week and the S&P 500 added 1.1% for its third up week in a row. The S&P 500 broke through an area of prior resistance around 1,230 and closed last Friday at its highest level since Aug. 3. That means the bias of the market has suddenly shifted to the upside between now and the end of the year.

This market's strong performance was reflected in your

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