No Signs of A Clean S&P Breakout

by Richard Band | July 18, 2012 10:35 am

No Signs of A Clean S&P Breakout

Just barely.  In the July newsletter, I told you the stock market, as proxied by the S&P 500 index, would need to “break cleanly above 1350 by mid-July” in order to keep alive our bullish scenario for the second half of the year.  Well, here we are in mid-July — and the S&P has just given us three consecutive daily closes above 1350.

Admittedly, this is no barnburner rally we’re dealing with (so far, anyway).  As long as the market can maintain its upward bias, though, with decent participation by the great mass of stocks and without excessive speculation, we’ll maintain a constructive outlook.

At a minimum, the S&P ought to be able to challenge its April high of 1419 (closing basis).  Should the national political dialogue this autumn give some hint that Washington might be ready to move toward tackling America’s long-term fiscal problems, the market would likely climb a good deal further.

For now, though, that happy prospect — if it is to emerge at all — lies well off in the misty distance.  In the immediate future, investors will have to grapple with a flood of data pointing to a sharp slowdown in economic growth, both abroad and now also here in the United States.

In his Senate testimony yesterday Federal Reserve Chairman Ben Bernanke was surprisingly frank about the situation.  “Manufacturing production has slowed in recent months,” he admitted.  “Surveys of business conditions and capital-spending plans suggest further weakness ahead.”

Bernanke also acknowledged the European financial crisis and the upcoming U.S. fiscal cliff as “significant downside risks.”  I encourage you to study the full text of his prepared remarks (click here[1]).

If even a political appointee like Prof. Bernanke is expressing worries publicly, there’s every reason for us to continue pursuing the safety-first investment strategy I’ve recommended to you all this year.  Our model portfolio remains 51% in equities — not a smidgen more.

That doesn’t mean I’m unwilling to buy individual stocks when they offer superior value.  I’m just very selective.  One name that looks intriguing again — for the first time in a long while — is the granddaddy of the computer industry, International Business Machines (NYSE:IBM[2]).

IBM shares peaked in early April at $210.69.  Since then, an accumulation of concerns about the global economy (nothing specific to IBM) has clipped almost 13% off the stock.

If you already own IBM, you might wait until the company issues its Q2 earnings report Wednesday afternoon before buying more.  For newcomers to the stock, I suggest taking a half position ahead of the earnings, and the remainder afterward.  (There’s a chance you might get a slightly lower price Thursday if management makes cautious noises in tomorrow’s release.)

I’ve refrained, until now, from commenting on the boardroom circus at Duke Energy (NYSE:DUK[3]), mainly because I wanted to see what collateral events it might trigger.  Tuesday a shareholder filed suit[4] against 10 members of the North Carolina-based utility’s board, charging that the directors damaged the company’s “credibility” by firing CEO Bill Johnson hours after Duke closed its merger with Progress Energy.

The legal argument looks pretty flimsy to me.  However, the ongoing bad press (and regulatory investigations) could knock the stock down another couple of points before a final bottom is reached.

P.S.  No bombshells in Tuesday’s after-hours earnings report from Intel (NASDAQ:INTC[5]).  Even so, the chip maker did cut its Q3 sales forecast[6], citing a “challenging macroeconomic environment.”

Like IBM and many other tech stocks, Intel shares had run up too far, too fast in the January-April euphoria.  Now it’s payback time.  INTC is a fundamentally strong company, but I would only buy this Niche Investment on a dip.

Endnotes:
  1. here: http://www.marketwatch.com/story/text-of-bernankes-prepared-testimony-2012-07-17?link=MW_story_latest_news
  2. IBM: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBM
  3. DUK: http://studio-5.financialcontent.com/investplace/quote?Symbol=DUK
  4. shareholder filed suit: http://www.reuters.com/article/2012/07/17/duke-lawsuit-idUSL2E8IH99Z20120717?feedType=RSS&feedName=mergersNews&rpc=43
  5. INTC: http://studio-5.financialcontent.com/investplace/quote?Symbol=INTC
  6. cut its Q3 sales forecast: http://finance.yahoo.com/news/intel-cuts-outlook-economic-woes-225900071.html

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