Tuesday, March 20, 2012
Stocks have somehow managed to shrug off European debt concerns, ignore a host of negative technical indicators, and continue to defy gravity by marching even higher. So it seems silly to keep harping on how vulnerable the market is to a swift and severe correction. Frankly, I'm growing tired of washing the egg off my face every morning...
Nonetheless, there are good and bad times to buy into the stock market. Since the S&P 500 is already up about 11% so far this year, and we have new caution signs popping up every day, I'm willing to go out on a limb and suggest that now is a bad time to buy stocks.
Yesterday, the S&P 500 did something it only does once or twice each year. The index closed above its upper Bollinger Band. Take a look...
Bollinger Bands help define the most probable trading range for a security. Any move outside of the Bands indicates an extreme move – one that is too extended and likely to reverse direction.
So yesterday's close above the upper Band is yet another warning sign that the broad stock market is vulnerable to a correction.
This happened twice last year. Following each occurrence, the S&P 500 was sharply lower five weeks later.
We saw something similar in 2010 as well...
Heck, even in 2009 – the year of the first quantitative easing-induced stock-buying binge – the market dropped 5% just a few weeks after the S&P 500 closed above its upper Bollinger Band in June. You can go back every year for the past decade and find evidence to prove the same point. Stocks are overextended... and they're vulnerable to a swift and severe correction.
Of course, I can't tell you when the pullback will finally start. I thought it would have started by now. But I certainly don't recommend buying stocks aggressively right here. They'll likely be cheaper sometime in the next few weeks.
Keep in mind one of Wall Street's oldest sayings... "Buy low and sell high." Which one do you think you ought to be doing today?
With the S&P 500 rallying above its upper Bollinger Band... I'm a seller.
Editor, The S&A Oil Report
The "Chart of the Day" is Ball Corp (BLL), which showed up on Friday's Barchart "All Time High" list. Ball on Friday posted a new all-time high of $41.39 and closed up 1.87%. TrendSpotter took a profit on a long position on March 6 and then turned long again on March 13 at $40.38. In recent news on the stock, RM Baird on March 16 reiterated its Outperform rating on Ball and raised its target to $47 from $45 citing improved sales due to warmer weather and an increase in customer promotional activity. Ball Corp, with a market cap of $6 billion, is a manufacturer of metal and plastic packaging, primarily for beverages and foods, and a supplier of aerospace and other technologies and services to commercial and governmental customers.
High-yield bonds have actually equaled the return of stocks over the last 25 years... And they've done it with half the risk (half the volatility).
I personally believe high-yield bonds are one of the best-kept secrets on Wall Street. And right now is a fantastic moment in high-yield bonds – possibly the best ever...
High-yield bonds – also called "junk bonds – are bonds that are rated below BBB or Baa (depending on the ratings agency). These bonds are officially considered "speculative-grade" bonds by the ratings agencies.
Most people are afraid of "junk" bonds – simply because of the name. But the name doesn't match up with reality today.
As I mentioned, over history, the investment returns on junk bonds haven't been "junk" at all. They have been GREAT.
There are times when it's dangerous to buy "junk" bonds. But right now is the OPPOSITE of that. Right now is actually a fantastic time to buy them. You are getting paid way more in interest in junk bonds today than you "deserve" to get, relative to the amount of risk you are taking. This situation won't last.
I say this for two reasons – 1) the spread and 2) the default rate.
Specifically... junk bonds are currently paying about 8% interest. Ten-year Treasury bonds are paying about 2%. So junk bonds are paying an enormous 6% interest "spread" over Treasurys.
The spread over Treasurys has been this high or higher only three times in the past: in 1991, 2002, and 2009. Every time, high-yield bond prices absolutely soared in the following years. Take a look:
Right now is different from those last three times. It's better. Right now is a much less risky time to invest in high-yield bonds...
In each of those three previous instances, high-yield bonds were defaulting left and right. In each of those three cases, the default rate on these bonds was over 10%.
But today, high-yield bonds aren't crashing at all. Today, the default rate on speculative-grade bonds is closer to 1.5%.
In short, high-yield bonds are priced as if the world is ending (as if the default rate were 10%) – but the world isn't ending (the default rate is near 1.5%). This is a ridiculous opportunity.
I see a big rally coming in high-yield bonds this year...
I envision hordes of retirement-plan managers desperate to figure out where the heck they're going to find interest in our zero-percent world. They will be stressing out. And they will land on high-yield bonds sometime soon.
High-yield bonds are in a ridiculously good sweet spot, paying a high interest rate relative to other investments, but having a low default rate. This simply doesn't happen.
Money managers will soon realize that the returns in high-yield bonds today are very high, relative to the default rates... And these investment managers NEED those returns to keep their jobs. So they'll be big buyers in 2012.
You can beat them to it... and earn the capital gains as they follow you into it.
You are set for high interest and solid capital gains in an investment that is in its "sweet spot." The simplest way to get in is through a fund of high-yield bonds, like the iShares High-Yield Corporate Bond Fund (HYG), paying 7.26% interest.
Right now is a great moment in high-yield bonds. Don't miss it.
This week may provide some trading opportunities for us if all goes well now that most traders are investors are all giddy about stocks again. Last week we saw money move out of bonds and into stocks and the bullishness vibe in the air reminds of many market peaks just before a 5%+ correction in stocks.
Depending how the SP500 unfolds we may be going long or short equities, long precious metals, long bonds, and our VXX trade may spike in our favor.
Bonds: After last week’s strong move down in bonds as the HERD moved out of bonds and into stocks it may be providing us an opportunity to catch a dip or bounce in the price of bonds. If the stock market sees strong selling this week money will run back into bonds.
Looking at precious metals it looks as though gold, gold miners and silver may still head lower this week. The charts are still bearish and pointing to another multi percent drop in value. Gold will look bullish around $1600, Gold miners (GDX) around $48, and Silver around $30 but we need to see one more wave of strong distribution selling for that to take place.
Crude oil has recovered nicely from its 5 wave correction which shook us out of the trade for a profit. I still like the chart for higher prices but with it trading at resistance and a high possibility of sellers stepping back in at this level I am not getting involved here.
The SP500 made a new high last night but has run into sellers early this morning taking prices straight back down. The chart in pre-market looks as though we will see lower stock prices later today and with any luck the fear index (VIX) will continue to rise in our favor.
You've probably never considered buying shares of Hong Kong stocks... but you should.
Hong Kong is a special region of China, with solid regulatory structures and low taxes. It ranks in the top three financial centers in the world. And as I'll show you, it's easy for U.S. investors to buy...
Right now, we have an incredible set-up in the Hong Kong stock market. Last time we saw this set-up, it was good for 88% gains... and judging by history, that's a worst-case scenario...
We call this set-up the "10/20 Rule"...
To use this rule, all we need to know is the price-to-earnings ratio (P/E) on Hong Kong stocks. A low P/E ratio shows that stocks are cheap... while a high P/E shows they are expensive.
The P/E ratio of Hong Kong stocks tends to bounce between 10 (cheap) and 20 (expensive). So we want to buy Hong Kong at a P/E of 10 and sell at a P/E of 20.
The 10/20 Rule triggered six trades over the past 40 years. The results of each trade are below...
You can see how extraordinary the returns can be. But the chart below really tells the story. Take a look...
All six trades on the 10/20 Rule were successful. On average, they returned 234% in under three years. The last time the 10/20 Rule triggered, investors walked away with 88% gains.
Right now, the P/E in Hong Kong is 10.8. Yes, that's over 10. But 10 and 20 aren't exact numbers... Hong Kong can bottom below 10 and peak above 20. And Hong Kong stocks are just starting an uptrend and pushing valuations higher.
We want to buy now.
The easy way to invest in Hong Kong is the iShares MSCI Hong Kong Index Fund (EWH). This fund tracks a basket of Hong Kong-listed stocks.
Based on history, we should expect to hold EWH for two to three years and collect triple-digit retunes.
Buy today and sell when the P/E hits 20 and our 10/20 Rule triggers a sell.