Are We in a Buying Stampede?
By Jeff Saut Jan 28, 2013 10:30 am
With the fiscal cliff debacle now passing into the rearview mirror, at least in the short-term, investors are going to have to start focusing on the fundamentals.
Of course such action is lighting up my phone with the question, "have we seen the bottom?" Such questions reminded me of this tale from an era gone by. It was August 1982 right after the bull market began when we at E.F. Hutton had a national call with the firm's strategist Newton Zinder. After telling us all about support points and resistance levels, he was asked, "Newton, all we want to know is, have we seen the bottom?" To which Newton Zinder, with all seriousness, said, "Well, if the market keeps rallying, then yes, we have seen the bottom!" I have not been so glib, having suggested for months that there is a 25% possibility that we are in a new secular bull market and nobody believes it. Consider this, over the past two alleged Armageddons our government has become just a little less dysfunctional. Last week there was even more movement that way when the DC Court of Appeals slapped down the National Labor Relations Board's appointees, potentially invalidating many of the NLRB's decisions. If so, that could unlock billions of dollars of "shelved" projects like Boeing's (NYSE:BA) debacle in South Carolina.
Ladies and gentlemen, if we can put the government's dysfunctionality behind us, the really good things that are occurring in our country should take the lead. Things like energy independence, onshoring, increased manufacturing, the strengthening housing recovery, strong auto sales, a technology boom, more employment, etc. Furthermore, as investors grow more comfortable with this outlook, money should move out of cash and fixed income and into stocks, other assets and goods/services; and, that move may have already begun (see chart below). As Bridgewater's Ray Dalio said, "The shift of that massive amount of cash is what will be a game changer."
With Dalio's thoughts in mind, we polled our analysts at Raymond James looking for their best stock ideas for a three- to five-year holding period that meet the following criteria: have a recurring revenue stream; have high barriers to entry in its markets served; its business is not dependent on the economy or financial markets to prosper; can grow EBITDA 5-10% annually or better regardless of economic conditions; competitive edge in its industry or sector; a company CEO who has been successful before; and the company is expected to be a superior investment over the next three to five years. Additionally, the stock should have: a current market cap of between $300 million and $10 billion, average daily trading volume of 100,000 shares or more, a stock price of $4 or more, and it need not pay a dividend. Further, no banks or utilities were considered. These are the stocks that made that screen: Altera (NASDAQ:ALTR); Conceptus (NASDAQ:CPTS); Denbury Resources (NYSE:DNR); NIC Corp. (NASDAQ:EGOV); Equinix (NASDAQ:EQIX); EV Energy (NASDAQ:EVEP); IDEXX Laboratories (NASDAQ:IDXX); Iridium Communications (NASDAQ:IRDM); LKQ Corp. (NASDAQ:LKQ); National Oilwell Varco (NYSE:NOV); Verisk Analytics (NASDAQ:VRSK), and Wabtec (NYSE:WAB).
The call for this week: In last Friday's Morning Tack I talked about a pattern in candlestick charting known as a "doji" formation. A doji represents indecision in the market. When a doji forms in an uptrend or downtrend, this is normally seen as significant, as it is a signal the buyers are losing conviction, or that sellers are losing conviction. If, however, the doji formation is ignored by the market, like it was on Friday, it probably means the buying stampede remains in force. But at day 18, in the typical 17- to 25-session skein, this rally is pretty long of tooth. That said, there is nothing in my work that suggests we are anywhere near a major top in the equity markets, even though we could be near a short-term trading top based on my day-count sequence and the overbought conditions. Nevertheless, I would not get bearish because in the intermediate term we could be involved in what we saw from July 2006 until February 2007 where the SPX gained 225 points (~18%) and only experienced 20 – 30 point pullbacks along the way. Indeed, as Bridgewater's Ray Dalio said, "The shift of that massive amount of cash is what will be a game changer."
No positions in stocks mentioned.
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