My friends don’t usually want to talk about the stock market. For most of them, retirement is far enough off that they aren’t paying attention to the performance of their 401k, if they have one, and most of their savings are earmarked for paying off student loans or perhaps buying a house. Most of them wouldn’t be able to tell me if the Dow was closer to 14,000 or 1,400.
In a way, they’re my own contrarian indicator. Much as serious investors start worrying when a stock market rally makes the cover of Newsweek, I know that something’s up if one of my friends brings up the stock market.
For the last month of gains, not a peep.
And then, over drinks this weekend, one of my best friends mentioned that she’d gotten an email news alert from the New York Times about the S&P breaking 1,500.
This rally is no longer a secret.
Since my own personal, but very unscientific, contrarian indicator was giving a signal, is it too late to get in on this rally?
Well, the stock market has had a great month; the S&P has climbed about 7%. But the gains didn’t begin December 31: since putting in an intermediate-term bottom in mid-November, the S&P is up about 11%.
Those are good gains.
And they’re convincing many investors: the New York Times news alert that my friend was talking about began, “After millions of people all but abandoned the market following the 2008 bust, individual investors are pouring money into stock mutual funds like they haven’t in years. ... Now, the investing public seems more afraid of missing out than of misreading Wall Street again.”
I don’t argue that the market has done very well, and that it’s regaining more investors’ trust every day.
But I still think we have a lot further to go. I would compare the stock market’s gains so far to the recovery in the housing market after the sub-prime crash.
Yes, housing numbers have improved by leaps and bounds. Yes, the housing supply is “dwindling” (according to a recent headline from NBC News). Yes, average home prices are rebounding, and in a few select places (like the Hamptons) they’re hitting new highs.
But buyers still aren’t snapping up McMansions in Arizona for twice what they’re worth. We’re returning from absolute zero to a healthy but fairly normal housing market condition, not a frothy seller’s market.
That’s the same kind of sentiment I see surrounding the stock market today. The New York Times might think “the investing public seems more afraid of missing out than of misreading Wall Street again,” but they’re comparing today’s sentiment to average sentiment over the last few years, not all time. And sentiment over the last few years has been, in general, abysmal.
Too many investors lost too much in 2007-2008. Very few are going to be “exuberant” about stocks any time soon. And that’s why I don’t think it’s too late to get in on this rally... even if one of my friends knows it’s happening.
If you’re convinced, I have an idea from the latest Investment Digest that’s a sort of double play on the bull market. Read Mike Cintolo’s recommendation from Cabot Top Ten Trader below for the details.
“As the general market has heated up, we’ve noticed more and more ‘Bull Market stocks’—brokerage, investment bank and asset management firms, each of which directly benefit from higher stock prices and increased trading activity—pushing to new highs. BlackRock, Inc. (BLK) might be the granddaddy of the group; the company has an almost unbelievable $3.8 trillion of assets under management! Obviously, that’s not mom-and-pop investors, but big institutional pension and hedge funds, as well as some very wealthy individuals.
“One big driver is the firm’s iShares business, which it purchased in 2009 and has been a big hit; BlackRock’s top brass alluded to a secular shift into ETFs and more passive investments, which plays right into iShares’ hands. Best of all, management is committed to returning cash to shareholders—it just hiked the dividend 12%, resulting in an annual yield just south of 3%, and continues to buy back shares quarter after quarter; the company repurchased about 5% of its shares last year, and has authority to buy another 5% going forward. With sales growth picking up, earnings growth accelerating and the potential for better-than- expected earnings in 2013, if the market continues its winning ways, we think BlackRock has solid upside.
“Technical Analysis: BLK actually peaked back in January 2010 at 244; since that time, earnings have grown quarter after quarter, yet the stock hasn’t been able to make any progress. That looks to be changing now, however—after bottoming last May, the stock tightened up beautifully for a few months, and now it’s climbing steadily, punctuated by last week’s solid upmove. BLK isn’t a runaway-type stock, so we think you can get in on a small pullback in the days ahead.” - Michael Cintolo, Cabot Top Ten Trader, 1/21/13
For more on growth stocks recommended in Cabot Top Ten Trader, click here.
Finally, if you disagree with me about the large reserve of pessimistic investors who could push this rally further, feel free to let me know by replying to this email. (You can let me know if you agree too!) I’ll add your opinions it to my dashboard of informal sentiment indicators.
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
