Big Rally Ends Wild Week

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Big Rally Ends Wild Week

It was a record week for volatility, with the Dow gaining or losing more than 400 points in four consecutive sessions before a big rally sent stocks jumping higher into the weekend.

The most recent bout of volatility is being driven by one very key question.

Is the market simply repricing slower economic growth or is this the beginning of another economic meltdown?

On the economic meltdown front, you have serious financial issues out of the Euro zone fueling pessimism. The latest shoe to drop is that French banks have approximately $750 billion in exposure to Italian bonds, making the two countries virtual bed partners and a startling reminder of how connected all the big global financial institutions are.

And when talking about economic meltdown, you definitely need to include the United Stated, battling its own financial demons with an unsustainable deficit and crippling debt. The market still has faith in the US, on display with record-low Treasury yields, but if that changes there will be serious repercussions for all asset classes.

But keep in mind, there is no shortage of opinions about the market and economy, and there are plenty of analysts and portfolio managers saying the recent pullback is nothing more than the recalculation of slower growth. That notion is supported by all the recent data, while not exactly blowing anyone away, still supports expansion, with Q2 GDP up 1.5% and jobs being gained every month.

And here’s something else to consider, maybe more important than everything else. Corporate earnings are still awesome, with Q2 earnings season showing strong sales and earnings growth and the S&P500 holding a mostly optimistic outlook.

So as you can see, there are more than a few good reasons to be either bearish or bullish, which is exactly what is driving this recent bout of volatility and mania on the Street. The bulls scored a few points on Thursday and Friday, but the averages are trading well of their highs from April, so pessimism still rules for now. But as we have all seen, that can change on a dime, so let’s stay optimistic and look for earnings and economic growth to support the market.

Updates:

CF Industry Holdings (CF) was the big winner, adding 15% on the week on the heels of strong Q2 results and rising estimates. CF has looked seriously undervalued relative to its peers, so this recent jump higher looks like the market taking note of that. Shares closed the week with a new 52-week high above $168 so we have some nice upward momentum in hand.

Double Gold (DGP) was also on the move, gaining 10% on the week as investors continue to view precious metals as the #1 hedge against economic uncertainty and currency devaluation. Gold has come a long way in the last ten years, but for the time being, the trend is still higher.

iPath US Treasury Long Bond Beat (DLBS) is an ETF that gains value if US borrowing costs increase. That did and still does look like a good bet based upon the Federal governments unsustainable deficit and massive amount of debt. But there is a saying in the market that goes “don’t fight the Fed,” and with the central bank coming out this week and saying it plans to keep interest rates low until 2013, the trend is working against DLBS. We’re out of this one for now, but if the bond vigilantes decide to come out and punish the US for its trashy financial conditions, DLBS will be a great way to profit.

We also saw some weakness from CPL Energy (CPL), falling 8% as investors shifted into riskier, higher growth areas of the market. This Brazilian electric utility with an impressive 7% dividend is also battling general weakness in the Brazilian stock market, falling more than 20% from its high and officially entering a bear market. Longer-term, the 7% dividend provides plenty of support while prices fluctuate in the short run.

And finally, we saw a solid gain from Intercontinental Exchange, Inc (ICE) this week, adding 4% in spite of some short-term weakness on Friday. As a leading derivatives exchange, ICE gains when market volatility increases because it pushes trading volumes higher as well. So even though the market has been a bit chaotic lately, there are still unique ways to benefit from the madness and ICE is one of them. Longer term, there has been lots of consolidation and growth in the industry, so both forces should continue to support this all electronic derivatives exchange.

That’s all for this week, but until next time, here is a good article that discusses the Fed’s decision to hold interest rates at a record low to keep trying to stimulate the economy. Enjoy.

Bernanke Seizes Day to Lower Bond Yields

Your Investment Partner,

Mike

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