Wednesday, November 09, 2005

New Leaders and Old


The stock market is acting as expected. An after rally profit taking session has been in progress keeping the market from moving higher. Market action for the S&P500 for the last few days shows a break through tough resistance at 1215 and a settling in at its current level of 1222. The fact that the index stays above the 1215 level bodes well for a move higher. Further, a falling level of volume in the period suggests that profit taking is decelerating. Thus, I would expect the market to base here then breakout higher on a short term basis. Essentially the same scenario is happening for the nasdaq composite, therefore I would expect similar action for that index as well. That said (there is always a "that said"), the consensus expects a year end rally, which could throw dirt on any rally chance. In order to beat the consensus the smart money will be looking in arcane places for the new leaders as any new rally is likely to have some new faces.

New Leaders and Old

The latest rally lifted all stocks including previous leaders that fell hard in October. As the latest round of profit taking plays itself out I expect there to be a change of leadership as old leaders stagnate and new leaders rise. Energy stocks, the hands down leader of the last business cycle, have been a mixed bag of late. Most energy stocks have come off their peaks and have started to tail off during the current round of profit taking, failing to make new highs and putting technical stress on the group. Homebuilders sing a similar song as low interest rates, unprecedented demographics, undervalued real estate and monumental consolidation drove their stocks to all time highs. Now similar structural forces that affected energy stocks are weighing on housing stocks. Rising interest rates and rising housing prices that out pace incomes (as well as high energy costs) are slowing sales and driving housing stock prices lower. If there is a market move higher I do not expect these former leaders to out pace the new ones.

The smart money knows that future market leaders are likely to be stocks that have accelerating earnings in a changed environment. What will the changes be? That is open to speculation. Left to the consensus it will be stocks that do well with lower energy prices, higher interest rates and potentially higher taxes. Only time will tell but I think the market is signaling something different. Financial, semiconductor and transportation stocks have led the recent rally and, unlike the past leaders, have held their gains thus far. What is odd is that these groups tend to be the ones that lead during a new bull market. Perhaps their move is a foreshadowing that interest rates are about to top out, the economy will have a soft landing before it returns to higher growth fueled by globalization, a scenario that is not out of the question and one we lean toward. We are not saying their will be a clean move higher at all; in fact we predict rollercoaster like volatility with peaks and troughs that test investor mettle. Carefully building positions with solid fundamentals and technically timed entry points will help to provide profits levels we are use to. In other words, educated speculation by forward seeing managers is required. We already started to invest in future leaders. See our website at to view our positions.

  • IAU - IAU is an exchange traded fund that reflects the day to day movement of gold bullion. There are many reasons to own gold at this time. Increased currency volatility, banking system surprises, stagflation/inflation, global unrest or the fact that gold has begun to break out of a long term base. We are adding IAU to our portfolio as we believe that potential structural changes favoring the metal are growing and technical characteristics exist to support an investment at this time. Further, given the long base that gold has been in we currently believe that downside risk is limited.


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10:23 AM  

Another day another interesting stock.

9:43 AM  

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