Thursday, August 12, 2010

Time to Cheer or Jeer?

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

For more than a year, both here, and in my Street$marts newsletter, I've been writing about the potential for this bull run to see its peak between Memorial Day and Labor Day of 2010 somewhere between Dow 11,500 and 13,000 with the possibility of another recession (double dip or whatever you want to call it) in 2011.

With many pullbacks along the way and after the significant May/June correction, which I underestimated the severity, several folks have asked if my forecast has changed. And after Wednesday’s stock market rout, it’s as good a time as any to discuss.

I think some people thought the 15%+ correction could have been what I was looking for later this year and we’ll now see another year or so of bull run, while others asked if the April high was THE peak. In short, it's more the latter. Price MAY have seen its high, but I still believe, worst case, the stock market has more explosive upside action left in the coming few weeks or so.

Here are the three possible scenarios laid out in a chart.

“A” shows the recent weakness ending quickly and a sharp, fast rally ensuing almost immediately. “B” says more of the same with rallies and declines remaining in a well defined trading range. “C” indicates that disaster is already here and stocks are headed below the recent bottom. As I mentioned above, I am going to stick my neck out and say that scenario “A” is my preferred path until proven otherwise. Our investment indicators and models remain positive, so I have to nervously follow along until they indicate otherwise.

Interestingly, the cumulative total of stocks going up and down on a daily basis (advance/decline line) just made a new high, unusual for a market that is trying to peak. While it may be because of how many issues are interest rate based, I've learned the hard way not to so easily dismiss these things. We can ALWAYS find a reason not to believe something.

Also a bit puzzling is the behavior of junk bonds, which are also making new highs. This sector usually sees weakness BEFORE the overall stock market does as liquidity tends to dry up before the final high in stocks, not coincidentally. Like any other curious period, we'll take one day at a time and assess our portfolios as needed.

Sector and sub sector behavior has been very positive with a slew looking for further gains this month. Semiconductors, software, telecom, Internet, financials, real estate, leisure, health care, biotech, staples, utilities, transports, industrials, materials and energy to name more than a few.

Emerging markets have also taken a leadership role with almost every single country on our watch list behaving very well. With our Emerging Markets Program owning Thailand, Turkey and Indonesia, I am more than nervous as this area corrects hard and fast when the buyers step away, something that's getting overdue.

Long time readers know that our philosophy and methodology along with my personality tend to have my confidence level the highest at or near the bottom of significant declines. The more price advances from that point, (assuming it actually does) the more concerned I become as we “dance” closer and closer to the door. While I am certainly not as confident as I was buying with both hands on July 1, I am not as concerned as I was in late April either. That time will come if and when the Dow sees 10,800 or another 500 point rally from here.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

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