Technical Breakout Holds and Commodity Value Stocks
The market bulls overcame the key levels finally this week with a strong breakout yesterday. After numerous failures at these levels and a selling scare last week, the buyers reacted positively to the Fed comments yesterday along with some important bullish action in the financials.
We have been watching for 5 things to get more bullish overall about the market at these highs. It is one thing to get near old highs but it is another to get a breakout to new highs. The rule of thumb in markets is that new highs usually lead to more upside.
The five things we are watching to give us a bit more confidence about the technical breakout are:
1) The major markets need to hold their breakout levels (1,375 S&P 500; 3,000 COMP; 13,000 DJIA) – today was a good pause and hold day above them and these levels NEED TO HOLD going forward.
2) The financials have to participate for a more sustained move higher – yesterday was a huge breakout technically for financial stocks and it was good for investor confidence with a passing of their stress tests.
3) The DOW transports and the Russell 2000 have bounced strongly to close the huge divergence with the rest of the markets. This had to happen to push higher instead of having the major markets be pulled down with their recent weakness.
4) Oil prices needed to stabilize and that has happened in the last 5 days.
5) The long term treasuries needed to show significant weakness (selling) to signal the big institutions are finally more comfortable about putting money back to work in equities. That happened in a big way the last 2 days with strong selling and a breakdown in the TLT below the 200 SMA. The TLT could have small bounces from here but the intermediate trend is down and that is the key.
2) The financials have to participate for a more sustained move higher – yesterday was a huge breakout technically for financial stocks and it was good for investor confidence with a passing of their stress tests.
3) The DOW transports and the Russell 2000 have bounced strongly to close the huge divergence with the rest of the markets. This had to happen to push higher instead of having the major markets be pulled down with their recent weakness.
4) Oil prices needed to stabilize and that has happened in the last 5 days.
5) The long term treasuries needed to show significant weakness (selling) to signal the big institutions are finally more comfortable about putting money back to work in equities. That happened in a big way the last 2 days with strong selling and a breakdown in the TLT below the 200 SMA. The TLT could have small bounces from here but the intermediate trend is down and that is the key.
It has been an impressive move up of 6 days in a row after the selloff. However, once again we can’t provide an all clear just yet. In the short term, AAPL has gone parabolic again at close to $600 and the VIX bounced strongly today suggesting a pullback is close. A minor pullback to relieve the overbought conditions would be natural and retesting the key breakout levels for support is often very typical price action. MR has a hold recommendation right now.
Using the Power Stocks Table:
(1) Risk: Conservative (Cons); Moderate (Mod); Aggressive (Aggr); Speculative (Spec)
(2) Stop: Typically use a 3 to 4% closing stop below the entry price
(3) Trailing Stops: Use the 10 EMA (Swing) or 20 SMA (Short Term Trader) for protecting gains once above it; SMA = Daily Simple Moving Avg; EMA = Daily Exponential Moving Avg.
(1) Risk: Conservative (Cons); Moderate (Mod); Aggressive (Aggr); Speculative (Spec)
(2) Stop: Typically use a 3 to 4% closing stop below the entry price
(3) Trailing Stops: Use the 10 EMA (Swing) or 20 SMA (Short Term Trader) for protecting gains once above it; SMA = Daily Simple Moving Avg; EMA = Daily Exponential Moving Avg.
Commodity Value Stocks:
Many commodity stocks in materials, energy, and agriculture and related stocks in railroads and shipping are still at some very attractive valuations. The statistics so far coming out of the US in 2012 are much better across the board. China’s growth is slowing but it is still close to 8%, and the reports out of Europe are only indicating a mild recession.
And, because oil and some refined products are going up in price, many of the energy stocks should do better going forward with earnings. This is the second list of stocks in our investor series on value stocks in these sectors. This is an excellent investment opportunity to pick up some of these stocks at real bargain prices if you hold them for 12 months or more.
Top Commodity Value Stocks:
Investor Notes:
Gold and Silver:
Gold and silver pulled back a bit after the Fed’s release and their comments this week. Investors took the news as a reduced probability of QE3 and it was supportive of the dollar in the short term. But both gold and silver are still holding their longer term trendlines and are actually tracing out bullish inverted Head and Shoulders patterns. These are strong patterns for big moves up if they play out and our recent blogs support higher prices later in 2012. It may take some patience in the short term with some choppy price action but scaling in on weakness is still prudent for long term investors in our opinion.
MR will publish a blog later this week on the inverted head and shoulders patterns along with a list of some beaten down and good value plays in the gold and silver miners. Check our our recent blogs.
Long Term Treasuries
Also, we wrote a very important blog in February about how the Long Term Treasury Bond yields could only go up. We were in fact correct as the TLT has been mostly lower since that blog. And, the last 2 days finally started the heavy selling that we forecasted for 2012. This is good for equities as this money will be put to work in stocks and it is a vote of confidence that things are getting better. Read that earlier post and look to buy the TBT (Ultrashort Treasury) for bigger gains this year.
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