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The Bulls Strike Back, But the Future's Unchanged - Though the market
managed to offset Tuesday's selloff and muster a gain for the week, the
damage may already be done. And, considering the same damage has lead to
bearish results before, the bulls may want to digest this reality.
* From the
Editor: Four Possibilities for the Sandbox Portfolio - With profits
being taken on more than a few names in the sandbox portfolio during the
month of October, the number of holdings is a little too depleted. Here
are four potential trades that could be used to restock the portfolio,
once the time for an entry is right.
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The
Bulls Strike Back, But the Future's Unchanged |
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Kudos to the
bulls. The effort still isn't likely to be enough to thwart a pullback,
but you have to give credit where it's due.
 All
told, investors shrugged up Tuesday's implosion, and managed to end the
week with a small gain.... about half a percent in most cases.
Yet, the problems
are still glaring. Indeed, as each day passes, the problems glare a little
more,
pointing to a brewing downside move.
Not that history
is everything, but the shape of the S&P 500's chart (and all
the index charts for that matter) are looking eerily like the charts we
saw as of April of this year, June of last year, and to a lesser degree,
like charts we saw in January of this year.
If you're wondering
what the commonality is, there are two. The first one is, each
of those periods were the end of an uptrend and the beginning of a substantial
correction. The second common element - nobody really expected
the selloffs to materialize at the time.
The nearby charts
tell the tale quite clearly. The market starts off the rally guns-a-blazin',
slows down to a less heated pace for a few weeks, then really starts to
fade once the upper Bollinger band (purple) is met. That's when we get
the MACD crossunder that, you can tell if you look closely, actually
happens BEFORE the market begins to slide lower.
Ring a bell?
Like we said, the shapes of the markets' charts over the last three weeks
are eerily familiar.
In the interest
of completeness, none of those pullbacks up-ended the longer-term bull
trend, and we don't expect this one to either. If history is any indication,
any selloff will be halted once the market reaches the lower Bollinger
band line. Granted, with the S&P 500's lower band line currently at
1039, that's a rattling possibility in the current case. That line would
be at a much higher level, however, by the time the index could
actually get there.
That being said,
what 'is' and what 'should be' can be two different things.
Though all signs
point to a move lower, clearly that move has not yet materialized. As such,
this is a case where the smartest move may be to do nothing for the
time being. We know the bulls are running out of gas; we just don't
exactly know home much gas is left in the tank (though it isn't much).
Be patient here, and wait for a key reversal day.... not unlike the one
we say on Tuesday, even though it hasn't gotten traction yet. There will
be plenty of trade-worthy downside once the move starts.
From the
Editor: New Names on the Watchlist
For those of
you who visit the site on a regular basis (or subscribe to the RSS feed),
you'll already know the 'sandbox' portfolio sold La Barge (LB) and Sea
Change (SEAC) on
Tuesday, after bailing
out of Westell (WSTL) on the 7th. Let's just say I have no regrets.
We avoided a small pullback with SeaChange, a big pullback with La Barge
(-5.7%), and avoided a ton of volatility with Westell.
Though WSTL
bounced back to $2.55 on Friday after reaching a low of $1.56 earlier in
the week - after we sold it at $2.28 earlier in the month - it's
still the kind of volatility that is (1) unpredictable and (2) usually
best avoided.
In any case,
I also promised with Tuesday' sell recommendations I'd be digging up some
new trading possibilities for the portfolio. Here they are.
None of them
are actually going in the portfolio yet, but that doesn't mean you
can't borrow them for yourself if you want - they're all certainly attractive
enough 'as is'. I'm just waiting for a better price, and/or need to do
a little more homework. In no particular order....
Rent-A-Center,
Inc. (NASDAQ:RCII)
- Though not nearly to the degree that other companies did, Rent-A-Center
took some lumps during the recession. While a tough economy is actually
a bit of a boost for rent-to-own retailers, the stunningly tight credit
market - along with excessive pessimism - even crimped some of this
company's business. With both confidence and credit on the mend though,
Rent-A-Center, Inc. is seeing growth again.
Better still,
the stock is responding. After taking the April-June tumble like everything
else did, RCII shares have stared to move upward again at a healthy pace.
And with P/E rations just above 8.0 on a look-back and look-forward basis,
why wouldn't they move higher?
 Rockwell-Collins
Inc. (NYSE:COL)
- No, it's not a micro cap. It barely even qualifies as a small cap (and
that's a stretch). It's a solid play though.
The key attraction
here is the budding momentum. After a bearish patch early in the year,
COL is coming out of a funk, and is still accelerating. In fact, the only
flaw with the chart right now may be that it's a little overextended. One
modest dip will take care of that.
While more chart-inspired,
it's not like Rockwell-Collins isn't backing it up with fiscal performance.
Priced at about 17 times trailing earnings, it's worth noting that the
company has beat estimates in its past three quarters. So, the pros may
be underestimating this industrial electronics and machinery stock.
Valspar Corporation
(NYSE:VAL)
-
The prospect of owning shares in a paint company is probably about
as exciting as watching paint dry - no argument there. It's reliable and
safe though, and it can't hurt to add a little stability in any portfolio.
That said....
Don't rule anything
out. VAL shares managed to put up a 100% gain between the lows from early
2009 and the highs from early 2010, which is more than most stocks can
say. In fact, Valspar shares are on the verge of new multi-year highs.
Results-wise,
the P/E ratios on the low teens are fine, though not earth shattering.
We have seen a couple of big earnings beats over the last year though,
and we also know other building materials stocks are on the move
for the same (or similar) reason.
 American
Equity Investment Life Holding (NYSE:AEL)
-
Speaking of groups that are moving, insurers have also been hot of late,
yet there's still tons of room to recover for the industry's stocks....
including
American Equity Investment Life Holding.
To be clear,
insurance stocks don't necessarily compare to other stocks on a valuation
basis; the revenue and business model are quirky. Yet, with a P/E of around
6.0 on a trailing and projected basis, even a quirky business model
can't suggest AEL is anything but a bargain.
Better still,
it's the consistency of growth driving the value. American Equity Investment
Life Holdings made more money in 2008 than it did on 2007, and more in
2009 than it did in 2008. We've also seen 'beats' in five of the last eight
quarters, so clearly the company is doing something right.
Though the stock
has been stagnant for a few months now, you get the sense that it's itching
for a breakout.
Like I said
above, none of them are being put into the portfolio just yet. I'll let
you know in the blog or in the newsletter if we make a buy out of any of
them.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
