A Bullish Bet on the U.S. Market for the Rest of 2011

For the week, the S&P 500 dropped 2.5%, snapping a four-week winning streak. The Dow pulled back 2%, after five straight up weeks. The Nasdaq shed 1.9%.

 

Your position in Spreadtrum Communications, Inc. (SPRD) bucked the trend, gaining another 7.30%, and is now up a whopping 38.09% since you entered it. Your position in livestock through the iPath DJ-UBS Livestock TR Sub-Idx ETN (COW) rose 2.67%.

 

You’ve enjoyed the benefit of racking up no fewer than 14 triple-digit percentage gains so far in 2011 as a subscriber to Bull Market Alert. Yet, overall the S&P 500 market has been flat since December 31, 2010.

 

Nevertheless, I expect the U.S. S&P 500 will end the year higher than it is now. That’s why I am recommending this week that you bet on just such a rise through the ProShares Ultra S&P500 (SSO) — an exchange-traded fund (ETF) that doubles the daily performance of the S&P 500 Index.

 

Consumer sentiment is so bad in the United States, it’s good. With headline risk in Europe as bad as it has been in recent memory, most investors remain extremely skittish. The Conference Board’s preliminary survey of consumer confidence came out Oct. 26 at 39.8, posting one of the worst results in the survey’s 40-plus-year history. When consumers get this negative, it’s been good news for stocks, without exception.

 

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 with an average 12-month return of 22.9%. U.S. consumers last felt this lousy in March of 2009 — right at the market’s bottom. With the S&P 500 up less than 1% since Oct. 26, the U.S. market has plenty more upside left by this measure.

 

November and December also are two of the strongest months of the year for the U.S. stock market, having averaged gains of 1.5% and 1.7%, respectively, during the past 60 years. So, if there is a time of the year to bet on the U.S. market, this is it.

 

Finally, a whole slew of contrarian sentiment indicators show that the market should continue to rally sharply from its current levels. The CBOE Equity Put/Call ratio recently hit 0.9 as investors paid up to protect portfolios through the purchase of put options. The Bull/Bear ratio is near the bottom of its range, suggesting that there are plenty of pessimists around who are ready to turn optimistic. Finally, huge spikes in the VIX (fear gauge) as we’ve had recently are often a sign of future gains.

 

So, buy the ProShares Ultra S&P500 (SSO) at market today, and place your stop at $36.00. If you want to play the options, I recommend the January 2012 $50 calls (SSO120121C00050000).

 

Here’s a word of warning. As a leveraged position, this ETF is more volatile than average, so you will want to reduce the sizing of your position accordingly. Also, this is a position that I currently hold personally.

 

Alexion Pharmaceuticals (ALXN) dipped 2.78% last week. ALXN has been range-bound for the past month — bouncing between $65 and its all-time high of $70. Standard & Poor’s gave ALXN a rating of “four out of five stars,” making Alexion a good bet moving forward. ALXN is currently a BUY.

 

Bank of Ireland (IRE) fell 14.10%. IRE gave back last week’s gains as news out of Europe continued to buffet the bank’s stock price. Bank of Ireland recently announced a deposit product named the “Four Seasons Deposit Account,” which aims at the agriculture business sector — giving clients competitive interest rates and flexible access to their invested funds. IRE is currently a HOLD.

 

National Bank of Greece SA (NBG) lost 6.78%, even as the leaders of Greece’s two biggest parties are due to resume talks today to agree on who should be the country’s new prime minister, after reaching a historic power-sharing deal to push through a massive financial rescue deal and prevent imminent bankruptcy. Last week’s surprise European Central Bank interest rate cut, lowering rates 25 basis points to 1.25%, should also help the NBG’s prospects. NBG remains a HOLD.

 

Spreadtrum Communications, Inc. (SPRD) continued its relentless rise when it gained 7.30% last week. SPRD announced a partnership with Sohu.com on Thursday and outlined plans for a mobile app store. This allows Spreadtrum to deliver a solid base of mobile applications and services to its user’s smart phones. SPRD reports earnings this week on Nov 9. SPRD is a BUY. Raise your stop to $23.25.

 

iPath DJ-UBS Livestock TR Sub-Idx ETN (COW) rebounded 2.67% last week. COW continued its move up from the 50-day moving average and through the 200-day moving average. A recent report from Bloomberg confirmed that demand for livestock has been increasing in the face of decreasing supply. And no government can revoke the law of “supply and demand.” COW is a BUY.

 

Companhia de Bebidas Das Americas (ABV) fell 3.48%. ABV rebounded off of its 50-day moving average, but could not manage a positive gain for the week. ABV is Brazil’s biggest brewer of beer, with number two Schincariol holding a distant 11% of the market share. Japanese brewer Kirin is attempting to break into the Brazilian market by acquiring Schincariol, but its efforts have been hampered by a messy legal battle with Schinicariol’s majority shareholders. All of this works in AmBev’s favor. ABV reports earnings on Nov 9. ABV is a BUY.