Thursday, April 29, 2010
Since October 2009, I've held an unpopular view of the stock market...
Around that time, many of the smartest traders and money managers I know turned bearish on stocks... or at least took the position that the huge rally since March 2009 was due for a long break.
Unless this is the first piece of financial research you've read in seven months, you know stocks have soared since October. They climbed for eight consecutive weeks. It's a surprising move, given the recent headlines – including an SEC investigation of Goldman for fraud and the huge bailout of Greece.
But now, even I have to admit some of the recent moves have been ridiculously unsustainable. For example, some homebuilders are up over 50% in three weeks on positive home sales data. One homebuilder, Hovnanian, is up 67% since my bullish piece last month. Financials like Citigroup and Bank of America are also up more than 50% over the past two months.
We are about a third of the way through earnings season. Thus far, results have beaten expectations. Although earnings are strong, markets do not have a history of going up in a straight line. In other words, don't hesitate to take profits.
Sure, the markets could move higher from here. But after eight weeks of gains, we seem a bit overdone. A pullback could result in a 5% decline in the major indexes.
Does this mean I think you should sell the bulk of your stock holdings... or refuse to buy any stocks? No way...
Pullbacks are healthy. They allow us to pick up some of our favorite names at favorable prices.
And if you do decide to buy stocks today, I'd make sure they are in a situation like Boston Scientific, which I discussed last week. The past 12 months have been terrible for Boston Scientific. Shares are trading near 10-year lows... and it's one of America's most hated stocks.
In other words, Boston Scientific already has a correction priced into it.
How do I know this? On Tuesday, the company lowered its sales guidance for next quarter. Despite the weak outlook, the stock finished higher on a day when the Dow Jones index plunged 200 points.
Boston Scientific has limited downside. Also, if the company reports any positive news, the stock could soar from these depressed levels.
This is a low-risk, high-reward stock. These are the types of trades I'm looking at with the market up eight straight weeks. I suggest you do the same.
Gold rallies above $1,170 per ounce for the first time since December.
Silver Wheaton up 18% in April... silver royalty business nears all-time highs.
Nokia plummets... cell-phone maker craters to new 52-week low, down 21% in two weeks.