Back in the Real World …
Three Clues to Determine the Market’s Next Move
Education Stocks: Here’s Another Leader
Normally, I don’t pay much attention to economic reports. If knowing all the details of housing starts, unemployment claims, industrial production and the producer price index helped me make money in the stock market, I’d be all over them. But they don’t, so I try to spend my time worrying about more important things … like the action of the market itself.
However, as I wrote on November 7 of last year, there is one economic number I regularly pay attention to–the Economic Cycle Research Institute’s U.S. Weekly Leading Index, which has a history of doing a terrific job of giving readers a good idea of what the economy will look like during the next two or three months.
Back in November, the Index’s growth rate had just dropped to a minus 24.6%, which, at the time, was the lowest reading ever! (Data goes back to January 1949.) And I wrote that “we’re all going to be seeing some truly scary, once-in-a-lifetime readings on jobs, industrial production, economic growth, you name it.” I think you’ll agree that has indeed been the case–more than a million jobs were lost in the past two months alone!
What’s happened to the Leading Index since? First, its growth rate continued to fall after I wrote the November piece, all the way below minus 30%. During the last couple of weeks, the growth rate has rallied a bit, but as of January 9 (the latest available release), the rate was still a pathetic minus 25.5%. To put that in perspective, the worst growth rate seen in the 1970s was minus 20% (during the mid-70s recession), and the worst reading ahead of the 2000-2002 downturn was around minus 10%.
Thus, I would guess that the next couple of months are going to be much worse than anything we saw during the last recession, or even worse than the depths of the 1970s downturn. Ugh!
Why do I bring this up? Because I like to keep in touch with what’s coming up in the “real world,” since 99% of my focus is with the “stock market world.” You should be sure to do the same; it’s all too easy to get wrapped up in stock market indicators, support levels, leading sectors and so on. It helps to know what’s actually going on in the economy when it comes to your life–i.e., buying things like cars, houses, HDTVs or even budgeting for your Super Bowl party.
(Congratulations, by the way, to both the Cardinals and Steelers; I will be rooting hard for the Cardinals, though I do think Pittsburgh is the better team. And while I don’t endorse gambling–cough, cough–I am intrigued that the Cardinals are getting seven points.)
However, there is an upside to these poor readings from the Weekly Leading Index because your cash–bank accounts, money market funds, CDs, etc.–is almost surely going to become more valuable during the next few months, as most items (including the big-ticket ones mentioned above) fall in price.
So, while caution is a good thing for your investments until the market turns (see below) now is a great time (if you have a cash reserve) to put together a shopping list for some select products or vacations that you’ve been waiting for.
Maybe you need some new hardwood floors; the wood is cheaper now than it has been in a while, and labor is also plentiful. Maybe you’ve been looking forward to traveling to that warm vacation spot; flights are finally coming down in price, and hotels have plenty of vacancy. Or maybe you just want a new HDTV and some new clothes for work; retail outlets of all stripes are eager for sales (Circuit City is having liquidation sales).
Personally, I’m in the market for a new house; my wife and I are just starting to look at places now. I anticipate lower prices for homes in the months to come in all neighborhoods, as more job losses occur and as more well-to-do folks who keep their jobs will get no raises, or pay cuts. I’m also hoping for a good deal on leasing a car (my wife will be commuting into the city) and some terrific home-furnishing deals.
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Back to the stock market, there are times when I can write to you that the market has a very, very high probability of going up, or down, or that a certain stock or sector is in favor or has definitively topped out. In other words … I (and most good investors) strive to have conviction, putting the odds strongly in our favor.
However, right now is not one of those times. Yes, the economy stinks, but the market’s action is indecisive–it’s certainly not good, but it’s not terrible, either. So what do you do during such times? Personally, I’m not doing much; the market is open every day, and I don’t see the need of putting a ton of people’s money into stocks when the overall pattern is unclear.
Yet that doesn’t mean I’m literally doing nothing. The key is knowing what to look for; if you have a few clues to watch, you can be one of the early ones on board the next move … whether it’s up or down. So here are my top three things to watch in the weeks ahead:
1. The number of stocks hitting new lows on the NYSE (known as our Two-Second Indicator in the Cabot Market Letter). The number of new lows has expanded during the past week or two, but it’s nothing compared to what was seen last October and November; its biggest reading of late was just 116, compared to thousands last fall! To me, it’s a clear sign that the broad market is in far better shape than the popular indexes … something that often precedes major market rallies.
2. Philadelphia Banking Index (symbol BKX): This index has fallen to new bear-market lows in recent days, down more than 35% in 2009 alone! In our studies, a bear market will not end until the “leader” of the move (financials in this case) bottoms out. The opposite is happening now, and the lower the Banking Index slides, the harder it’s going to be for the rest of the market to continue holding up.
3. Support levels for the major indexes: I’m always watching the major indexes, but the trading range of the past few months provides obvious support levels. I’m particularly interested in the levels of 7,800 and 8,000 in the Dow Industrials, 800 and 820 in the S&P 500, and 1,400 and 1,450 on the Nasdaq. Decisive breaks below support levels by all three indexes for a few days (not just by one index for one or two days) would be bad news. The longer they stay above them, the better.
Most investors are attracted to the guru who’s going to tell them exactly what’s going to happen, and at what time. Well, the fact is the guru doesn’t know the future; nobody does. Instead, it’s best to repeatedly check the market itself–in today’s case, that means checking the above three items for clues as to which way the market is leaning. I think it’s going to make a big move during the next couple of weeks, and you might be able to get a head start on it if you stay on top of the new lows, the Banking Index and the major indexes.
One of the most encouraging signs I see in the market is the action of many potential leading stocks. There are more than a handful that are hanging in there despite the market’s woes. And there are a few that have actually broken out on the upside!
A group that has broken free is one that I pointed out to you in my last Cabot Wealth Advisory (dated January 5)–education stocks. Back then I wrote:
“While December was a quiet time for most indexes and stocks, it allowed many groups to build basing structures–I’m talking about multi-week bases, where stock gets transferred from weak hands to strong hands–which could propel them to gains in 2009.
Education stocks are no exception, with stocks like Apollo (APOL), DeVry (DV) and Strayer Education (STRA) all consolidating relatively quietly in recent weeks. I wouldn’t say the group is strong … but that could change.
Apollo Group is the gorilla of the bunch. It’s reporting earnings on Thursday, January 8 … if it’s greeted with enthusiasm, it could propel not just APOL, but also DV, STRA and others much higher.”
Well, that is exactly what happened–APOL surged to new peaks on January 9, and it took the whole group along for the ride. However, DeVry and Strayer, while rising on the good tidings, have not hit new-high ground. One that has is ITT Technical Institute (ESI), which surged past resistance just above 100 on more than quadruple its normal volume. Powerful!
ESI’s story isn’t that different from all the for-profit education stocks–basically, a poor economy is leading more people to go back to school to boost their resumes, and they’re staying there longer because jobs aren’t plentiful. (You can read more about the company in this week’s Cabot Top Ten Report.)
I like the powerful breakout by ESI above resistance, and the bullish action among a variety of stocks in the group. And what I like even more is the company’s earnings report this morning: Revenues grew 21% to $280 million, total student enrollment grew 17% to nearly 62,000 and earnings leaped 34% to $1.61 per share, 17 cents ahead of estimates. The stock reacted well this morning on the news, and I think the stock is a good buy on any weakness.
All the best,
Editor’s Note: Michael Cintolo is the editor of our flagship newsletter, Cabot Market Letter, which, thanks to both its market timing and stock selection systems, has outperformed in both the bull market of 2007 and the bear market of 2008. (Overall, Cabot Market Letter is up nearly 20% since Mike took over at the start of 2007, while the indexes are down nearly 40%.) In fact, Mike was one of the only advisors who got his subscribers into cash in early September, avoiding the crash in the months that followed! Now, however, while most commentators worry about the fading economy, Mike is looking ahead to better times–he already has two new stocks in his Model Portfolio, and is eyeing many more should his indicators turn positive. Bottom line: If you’d like to protect your capital during bear markets, and still outperform the market during bull markets, you owe it to yourself to try Cabot Market Letter.