Here's the latest newsletter: A Little Strategy, a Little Action, 3/24/13
Strategy: Averaging down in a quality company has been a successful market technique according to recent evidence. However, a prerequisite is that you don't overweight your portfolio with an outsized initial position.
"During the year, 100% of the DJIA companies traded below their annual peaks. The intra-year declines ranged from as little as 5.8% (JNJ) to as great as 62.2% (HPQ). 30 out of 30 closed last week above their 2012 nadirs.
"The biggest recovery came in last year’s biggest dog (HPQ). Other large percentage rebounds occurred in lower quality BAC, old-tech companies (CSCO & IBM) and the controversial bank JPM. While those stocks were ‘falling knives,’ the old adages about never averaging down were certainly quoted numerous times. Adhering to that advice was a hedge against prosperity." (Of course buying at the absolute bottom is better than averaging down, but catching that bottom requires luck and we can't count on that...)
Strategy: Selling puts, for those comfortable with selling options, is a way to either profit by keeping the premium, or enter a stock at a lower price than it's currently trading at. We have our Virtual Put Selling Portfolio up and running.
Paul sees less bargains than he did several months ago. However, he still likes Express Scripts (ESRX), Quest Diagnostics (DGX), Lab Corp. (LH), Coach Inc. (COH) and Calamos Asset Management Inc. (CLMS) at current prices.
Patient investors may find better bargains if this toppy market sells off – which wouldn’t surprise us. We’ve built our cash position in the Virtual Value Portfolio up a little bit for this reason; sold our position in ICE.
Trends for next week courtesy of Lee Adler:
- Treasury supply will be heavy this week, while support from the Fed is reduced at the end of the month. This would normally unsettle the market a bit. But much of the $100 billion in Fed pumping from mid month may still be available for deployment. That could keep bids under both Treasuries and stocks.
- Foreign central bank (FCB) buying (US Treasuries) is in the weak side of its short term buying cycle but renewed fears over the European financial crisis are likely sending more private foreign capital flooding into the US Treasury market, and more Fed cash will be on the way, so weak FCB buying should not be enough to slow the markets.
- Recent strength in withholding taxes are resulting in a windfall for the government. Withholding tax collections for the 2 week period ended March 21 were up 11.5% over the corresponding period of 2012. That compares with a gain of 9.2% a week ago. This suggests that some sectors of the economy are much stronger than anybody realizes and may be overheating. Tax collections remain well above what can be attributed to the tax increase alone.
- The sequester could reduce Treasury supply by a small amount, which would be a bullish factor for both Treasuries and stocks. With less Treasury supply, more Fed QE cash would be available for stock and commodity speculation.
Read Market Shadow's A Little Strategy, a Little Action here.