The Little Market That Could

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Today’s ETF market reminds me of the classic children’s story, “The Little Engine That Could” and its unforgettable refrain, “I think I can, I think I can” as the little engine struggled up the hill against seemingly insurmountable obstacles.

On low volume and in the face of revolution abroad and at home, gathering inflationary storm clouds and weakness in Europe, “the little market that could” keeps climbing and passing significant milestones along the way

At Wall Street Sector Selector we remain positioned to take advantage of “the little market that could,” and recently closed an ETF option position in our Option Master Portfolio for a 48% gain in 11 calendar days. Positions in our ETF Standard portfolio show unrealized gains/losses of -3%, 0%, +2.7%, +3.1% and +1.3% for recently entered trades while the High Conviction (leveraged ETF) Portfolio has unrealized gains of +4.4% and +4.7% in its two positions. So after a rocky start in January, it seems that we’re on a more positive vector for Februar

On My Radar

Chart courtesy of StockCharts.com

Looking at the “big picture” of “the little market that could,” we see a chart that seems to be “forever overbought,” as demonstrated by RSI in the top of the graph and Stochastic at the bottom.

Plus the S&P cleared the psychologically significant level of 1332 which is roughly a 100% gain off the lows of March, 2009, so that has been quite a rapid recovery, indeed.

Now “dips” are little more than momentary burps as markets have become convinced that any “correction” will be quickly be repaired by the easy money of the Fed and the world has absolutely become addicted to the flow of liquidity that has been coursing around the world for lo these many months.

Of course, as the old saying goes, “nothing lasts forever,” but for now we will climb the mountain with the little engine, even though the ride down the other side promises to be terrifying indeed for those who fail to get off at or near the summit. But the downside will offer equal opportunity by virtue of our ability to “short” the market using inverse ETFs.

The View From 35,000 Feet

This week seemed to be all about riots, both at home and abroad.

In the Middle East, unrest has spread to Libya, Algeria, Yemen, and Bahrain and increasingly, it looks like Saudi Arabia could be next up.

At home, mass demonstrations in Wisconsin were our own version of civil unrest as the unions square off against the Governor and the Democratic State Senators left the state to prevent their Senate from being able to form a quorum to consider the proposals for benefit cuts and spending reform.

Meanwhile, the U.S. House of Representatives set up a showdown of a different sort as they put forth $61 Billion of spending cuts and the high stakes game of chicken between Republicans and Democrats escalates as the Federal funding deadline of March 4th approaches.

Fed Chairman Ben Bernanke was in France busily defending his quantitative easing policies while 19 large U.S. banks were told to undergo stress tests assuming another recession with 11% unemployment. (Many analysts would argue that we’re already in that situation or worse)

And overseas, Portugal seems rapidly heading for a bailout as the yields on their 10 Year Bonds hit a record high of 7.5% amid signs of a re-emerging liquidity crunch in Europe. China raised its bank reserve requirements by another 50 basis points in an ongoing, so far relatively ineffective, effort to combat inflation that seems to be spreading around the world at an accelerating pace, with world food prices increasing 29% year over year and forcing more than 40 million people into poverty.

On the sentiment front, bullish sentiment as reported by Investor’s Intelligence and American Association of Individual Investors remains at extremes, along with a recent report from Merrill Lynch that shows fund managers’ bullishness at record highs while the National Association of Active Investment Managers (NAAIM) Survey of Manager Sentiment(the NAAIM Number) is 83.73% compared to last quarter’s average of 66.99%. NAAIM

Economic reports were mixed last week with unemployment stubbornly rising, retail sales weaker than expected, and industrial production and leading indicators all showed declines. However, on the positive side of things, housing starts were up, the Empire Manufacturing Index showed improvement as did the Philadelphia Fed report on economic activity.

Finally, the FOMC released the minutes of their meeting in which they expressed disappointment at the weak labor market, were happy with the strong stock market and, although they see increasing upside risks to inflation, are sticking to their program of quantitative easing which will buy bonds everyday next week to the tune of $17-25 billion.

What It All Means

So we continue to live in dangerous times around the world with potential threats to the global oil supply and stability in the Middle East, growing inflation and systemic threats in Europe and our own budgetary problems and looming battles at home.

Economic reports remain mixed; however, corporate profits continue to shine as earning season continues during the holiday shortened week ahead.

The “Bernanke Put” remains in play as we have been discussing for the past several weeks, and so the bulls are likely to remain in control until the put expires, whenever that may be.

The Week Ahead

We get lots of economic reports this week in the housing sector while earnings reports will come hot and heavy in the retail sector. Major names reporting this week are Target, Gap, JC Penny, Home Depot, Office Depot, Walmart, Hewlett Packard, Dollar Stores and Limited which should give some insight into the state of the all important consumer.

Friday brings the 4th Qtr GDP revision which will be closely sliced and diced to see how fast the U.S. economy might really be growing.

Economic Reports

Tuesday: December Case/Shiller Housing Index, February Consumer Confidencee

Wednesday: MBA Mortgage Index, January Existing Home Sales

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, January New Home Sales

Friday: 2nd Quarter GDP, Final February Michigan Sentiment Index

Sector Spotlight

Winners: (NYSEArca: SLV) Silver (NYSEArca:THD) Thailand

Losers: (NYSEArca: ECH) Chile (NYSEArca: IYZ) Telecom

This weekend we went to the Oregon High School 5A State Swimming Championships in Portland where my son came away with two wins in his individual events, the 200 and 500 yard freestyles. Both races were duels to the finish (exciting however a bit too stressful for old Mom and Dad) but winning the championships was a wonderful way for him to wrap up his high school swimming career and lay the groundwork for college swimming next year.

Talk with you soon,                     To get a Complimentary Special Report from Wall Street Sector Selector, click here:

John

Wall Street Sector Selector

All information presented herein is for general information only and deemed to be from reliable sources, but we cannot guarantee its accuracy. Readers are strongly advised to check with their investment counselors before making any investment. There is risk of loss in all investment activity.





Posted 02-20-2011 5:13 PM by John Nyaradi