Category Archives: Market Fallacy Newsletter Archives

Market Fallacy 2.0

Market Fallacy is back with a new and improved format. Sign up for the Market Fallacy Newsletter at http://www.marketfallacy.com to receive insight into our proprietary approach. Stay tuned in to our blog to receive full market commentary. Market Fallacy will no longer give explicit buy/sell recommendations, but will instead provide a framework for understanding our proprietary analytics.

Look for a follow-up to the Summer Stock Picks, Earnings Season Coverage and Market Analysis

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Profit Taking?

Market Fallacy apologizes for any inconvenience that resulted from the switch to the new format. The Market Fallacy Blog, www.marketfallacy.wordpress.com, will now provide macroeconomic analysis, while the newsletter will give stock picks and recommendations. For the remainder of May the recommendations will be free of charge, but starting June 1, 2009, there will be a monthly charge to view the updated predictions. Each newsletter will be broken down into two types of recommendations: Preferred Picks and Optional Picks. Preferred Picks are must haves for any portfolio, whereas Optional Picks give the reader the opportunity to choose between two companies in a particular sector or industry. For Optional Picks, the recommended allocation is to divide the capital between the companies instead of holding full positions in both. This strategy is suggested since Optional Picks will typically be in the same sector or industry. When allocating do not over expose your portfolio to the given sector by allocating too much in each of the Optional Picks.
 
Preferred Picks
The three Preferred Picks for this newsletter are Goldman Sachs (GS), Ford Motor (F), Proshares Double Crude (DXO).
As of the close on Friday, Goldman Sachs is approximately 10% above its recent equity offering price. Based on academic studies in behavioral finance, on average, companies that issue seasoned equity offerings have approximately 40% cumulative abnormal return in the 500 days leading up to the announcement. On average, the price of the equity drops to reflect the new offering price, and then remains flat for about 3 months. The fact that GS has already been able to overcome the typical scenario has positive implications on Goldman’s future. Market Fallacy recommends buying Goldman Sachs (GS) up to $155. At the current price, this will be an approximate 15% return, in addition to the $1.40 per year dividend.
 
Ford Motor also just recently raised capital through an equity offering. Although the stocks has not returned to pre-issuance levels, Market Fallacy recommends buying Ford Motor (F) up to $8. At the current price, this will be an approximate 46% return.

 
Proshares Double Crude (DXO) is an etf that tracks twice the daily return of light sweet crude oil (WTI). Market Fallacy has had a buy rating on DXO since $2.80, and reaffirms this recommendation up to $6. At the current price, this will be an approximate 84% return.
For more information on Market Fallacy’s oil outlook, please visit www.marketfallacy.wordpress.com
 
Optional Picks
The first Optional Pick is in the basic materials sector and agricultural chemicals industry. Potash Corporation of Saskatchewan (POT) and Mosaic Company (MOS) are the two choices for the first Optional Pick.

Potash (POT)

Potash (POT)


Mosaic (MOS)

Mosaic (MOS)

 

Based on technical analysis, the triangle bullish pattern breakout implies POT is headed higher. POT has recently established support on top of prior resistance, also bullish. Market Fallacy recommends building positions in POT on pull backs only, as the current price has broken out above previous consolidation levels. Market Fallacy’s price target for POT is $130. At the current price, this will be an approximate 22% return, in addition to the $0.40 per year dividend. On Thursday, MOS had a bullish engulfing candlestick which was confirmed on Friday. This candlestick pattern in addition to the current breakout above the bullish channel suggest further appreciation in the stock price. Market Fallacy recommends buying MOS up to $63. At the current price, this will be an approximate 23% return, in addition to the $0.20 per year dividend.
 
The second Optional Pick is in the technology sector. Research in Motion (RIMM) and Apple (AAPL) are the two choices for the second Optional Pick.

Research in Motion (RIMM)

Research in Motion (RIMM)


Apple (AAPL)

Apple (AAPL)

Based on technical analysis, the rising wedge patter suggests RIMM is setting up to break out. After the recent pull back in techs, it is likely there will not be a better entry point the rest of the summer. Market Fallacy recommends buying RIMM up to $95. At the current price, this will be an approximate 31% return. Fibonacci retracements and Elliot Wave Theory explain the recent pull back in AAPL as a corrective wave. Wave 4 down precedes impulse wave 5 up, which in theory will be between 20-50%. Market Fallacy recommends buying AAPL up to $155. At the current price, this will be an approximate 27% return.
 
Market Outlook
After the recent 5% retracement, the market approaches an important point where it must decide to break the short term up trend or rejoin the longer term down trend. Given the recent economic data which suggests the economy is improving, Market Fallacy reaffirms its long positions. Any new optimism will spark additional fuel for this rally. In the coming days expect above average volume, volatility and price movement.

Sell in May and Go Away?

Friday the major indices ended their impressive six consecutive up week streak[1]. During the streak, the SPX averaged 4.15% return per week with the first week boasting a 10.71% increase. Regardless of what the media or the bears are saying, this rally has substance. A rally of this magnitude should not have lasted as long if the underlying fundamentals were not changing. The real question is whether or not American citizens will pay for this rally in the future. The answer is yes, and they will pay for it in the form of double digit inflation. For the future of this country, let’s hope unemployment begins to decrease before inflation begins to increase.
 
The major indices declined Monday and Tuesday on fears that the Swine Flu would turn into world-wide pandemic. As of Wednesday night, there have been 93 confirmed cases in the United States and one death. The one death in the United States was a 22 month baby in Texas, but the baby was not an American citizen. The baby was a Mexican citizen and was visiting Texas to receive medical attention. Although it is suspected that as many as 160 people have died in Mexico only 8 deaths have been confirmed. Swine Flu is suspected of sickening more than 2,500 people in Mexico, but only 99 cases have been confirmed by the CDC[2]. While this could escalate into a world-wide pandemic if the virus is able to spread to enough people, it is likely to be less serious than the attention it is receiving. Only people from Mexico have died, a fact that scientists cannot explain thus far. It is likely that Swine Flu will pass faster than Bird Flu or SARS[3]. Some of the confirmed cases in the United States did not know they had the virus, which may suggest the virus can be controlled with proper precautions.
 
Last Thursday, jobless claims[4] decreased by less than expected, implying an economic recovery. Although the existing home sales[5] were worse than expected, new home sales[6] exceeded expectations. This mixed housing data supports the notion that the housing market is bottoming. On Tuesday, consumer confidence posted[7] the largest one-month jump in four years. This data sparked an early morning rally, but low volume and Swine Flu concerns caused a late afternoon fade. GDP[8] contracted more than expected for the first quarter of 2009. This news, along with the Federal Reserve meeting, acted as the catalyst for Wednesday’s 2%+ rally.
 
The results of the Stress Test will be announced Monday, May 4th. There have been many rumors surrounding the release of these results, specifically in regards to some of the banks needing additional capital. Citigroup will likely announce the conversion of preferred shares for common shares at the conversion price of $3.25 on Monday following the release of the Stress Test results. The conversion will be an attempt to improve their tangible common equity, one of the main metrics of the Stress Test.
 
Market Fallacy expects the major indices to trade significantly higher over the next seven trading days. Current targets[9] for the SPX and DJIA are 950 and 9000 respectively. Following this explosion to the upside, an ensuing retracement is highly probable. The major indices have established new support above the previous resistant levels, an extremely bullish sign. The markets are preparing for a significant move in either direction, with a slightly higher probability for a move higher. It is not impossible for a retracement over the next two weeks, but unlikely. Market Fallacy now has a blog, which will attempt to provide insight into individual questions concerning the markets. Please visit the blog to receive personal attention regarding the markets. http://www.marketfallacy.wordpress.com
 
[1] SPX, synonymous with S&P 500, closed down 0.39% for the week beginning April 20
[2] Center for Disease Control and Prevention
[3] Severe acute Respiratory Syndrome
[4] Jobless claims consensus 651,000 vs. 646,750 actual
[5] Existing home sales consensus 4.72 million vs. 4.57 million actual
[6] New home sales consensus 330,000 vs. 356,000 actual
[7] Consumer confidence consensus 30.0 vs. 39.2 actual
[8] GDP consensus -5.0% vs. -6.1% actual
[9] S&P 500 target 950 and Dow Jones Industrial Average target 9000

Bull Market Rally

Monday the major indices made their largest single day move in six weeks[1]. The decline was fairly consistent throughout the day, and the indices closed essentially at the day lows. Bank of America’s pre-market earnings announcement Monday appeared to be the selling catalyst. Even after Monday’s huge decline, the Nasdaq Composite[2], remains positive year-to-date.

The leading indicator[3] release during the day Monday added to the decline as the indicator lost 0.3% last month. According to the release, “the recession has been long and with no end in sight though whether it is deepening in intensity is still unclear.” The indicators that decreased last month were building permits, vendor performance, factory workweek and jobless claims. It is not a surprise that jobless claims continue to decline as employment is generally viewed as a lagging indicator. The jobless claims report attempts to provide more timely information than the employment situation[4], but neither should forecast the direction of the economy. The two indicators that showed the most improvements were interest rates spreads and money supply which attempts to reflect active government intervention to stimulate the economy. These two factors reveal much more than the other indicators do about the state of the economy. In general governments attempt to spend their way out of economic contractions. Read my blog post for further analysis on the history of U.S. Recessions https://marketfallacy.wordpress.com/2009/04/20/1000-point-rally-coming/. These two indicators suggest the government is willing to do anything necessary to end this economic contraction, even at the possible expense of future Americans. Whether this is the government’s role is topic for another article.

AT&T, Boeing and Apple all rallied following the release of their earnings announcements. Of the three companies, AT&T was the only one to actually beat expectations, but Boeing and Apple provided commentary suggesting the current economic conditions are not as bad as perceived by the majority of Americans. High-end or luxury goods are showing increased sales which implies the wealthy are bargain hunting. This behavior is the pre-requisite to an economic recovery. Spending has to increase, and the easiest market for it to increase in is in high-end or luxury goods. As more companies report over the next two weeks, the outlook for the future will become more clear.

Although the market gapped down huge Monday morning, the major indices showed much resiliency Tuesday bouncing back and reducing significant amounts of Monday’s losses. Until the last hour of trading on Wednesday, the indices recovered most the losses from the early parts of the trading session, but were unable to sustain the rally. However, the Nasdaq did remain positive on the day. Small cap stocks[5] and technology companies[6] will continue to lead this rally.

Market Fallacy expects the major indices to end the week higher and add to the consecutive week streak. From a technical aspect, if the SPX can close above 875[7], the trend will be significantly higher. Market Fallacy expects another 15% increase before any significant retracement or consolidation period. As evident by Tuesday’s movement, this rally is not ready to end. The bears have had every chance to take the markets lower, and have had no such success. Monday’s decline was healthy and extremely bullish. Market Fallacy now has a blog, which will attempt to provide insight into individual questions concerning the markets. Please visit the blog to receive personal attention regarding the markets.

[1] SPX synonymous with S&P 500 lost approximately 4%
[2] Nasdaq Composite is a stock market index of all the common stocks and similar securities listed on the NASDAQ stock market, YTD up approximately 4%
[3] A composite index of ten economic indicators that should lead overall economic activity
[4] Employment situation releases the unemployment percentage whereas the jobless claims reports the number of of individuals who have filed for unemployment insurance for the first time
[5] Small capitalization stocks can be tracked by the Russell 2000
[6] Technology companies can be tracked by the Nasdaq
[7] Intraday high and now upside resistance