Enough Pain for Now-Let’s Look on the Bright Side

by Richard Band | November 16, 2012 11:00 am

Investors have worked themselves into an ugly mood over the coming fiscal cliff.  Including Thursday’s marginal loss[1], the Dow has shed more than 700 points (6%) just since Election Day.  Apple (NASDAQ:AAPL[2]), until mid-September the brightest star in the investment heavens, has since crashed 25%.

But I’ve got good news for you.  The panic and the pain have just about reached a climax—for now, anyway.  If Friday’s meeting between President Obama and congressional leaders results in even the slightest whisper of a solution to the fiscal bind, stocks could rocket higher.

How do I know?  Because technically, the stock market is about as deeply depressed[3] as it ever gets without triggering some kind of relief rally (usually lasting at least several weeks).

Over the past 10 NYSE sessions, the running total of daily declining stocks has outweighed advancers by a 1.73 to 1 margin.  It’s possible for that figure to climb even higher (it got up to 1.86 on May 18).  However, we’re now in the region where abrupt reversals often occur.

Don’t forget, moreover, that November to January has proved to be the winningest season of the year for stocks.  Since 1946, no other three-month period boasts a higher percentage of up months for the S&P 500 index.  December, in particular, sports a 77% win rate.

So, while I continue to harbor doubts about 2013 (especially if our leaders decide, in the end, to postpone any real action on the fiscal cliff), I think equities are due for a lift.  If you were thinking of doing any selling, now is not the time.

Wait for a 3% jump in the S&P — at a minimum — before you press the sell button on anything.  Don’t throw your hard-earned wealth into the fire!

In the meantime, the bargains are piling up in the utility sector[4].  There are so many, in fact, that I’m reinstating my buy recommendation for an exchange-traded fund that owns all the utes in the S&P 500 index:  Utilities Select Sector SPDR (NYSE:XLU[5]).

XLU has backtracked 11.6% from its 52-week high, set August 1, more than compensating for any likely increase in dividend taxes.  Thanks to the price drop, the fund now yields 4.3%.  Compare that with only 1.6% for a 10-year Treasury note.

Recall, too, that the companies in XLU’s portfolio can — and probably will — boost their dividends over time.  Buy XLU up to $35.

Among our individual utilities, I’ll call your attention to South Jersey Industries (NYSE:SJI[6]).  This well-managed, well-financed gas distributor, a member of our Incredible Dividend Machine, touched a 52-week low Thursday, even though the company has raised its dividend a stupendous 64% over the past five years, and sports a current dividend yield of 3.5%.

Is Wall Street crazy?  Sometimes—such as when folks paid $45 for Facebook (NASDAQ:FB[7]) last spring, or now, when they’re dumping a wonderful business like SJI at a 20% discount to its yearly high.

P.S.  For readers interested in playing the broader market, I should point out that a number of our mutual funds and ETFs are now back in attractive buying ranges.  If you’re looking to build a fund portfolio along the lines of the Fund Supermarket or one of our other models, now is a good time to start committing cash to our recommended equity funds, domestic as well as foreign.

Top pick:  FMI Large Cap Fund (MUTF:FMIHX[8]), which has reverted to its old best-of-class form over the past three months, pulling ahead of the riskier S&P 500 index.  Keep buying FMHIX as long as the S&P remains below 1392.

Endnotes:
  1. Thursday’s marginal loss: http://investorplace.com/2012/11/thursdays-ip-market-recap-aapl-tgt-wmt-znga-petm/
  2. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  3. the stock market is about as deeply depressed: http://investorplace.com/2012/11/daily-stock-market-news-grossly-oversold-market-due-for-a-bounce/
  4. bargains are piling up in the utility sector: http://investorplace.com/2012/11/retirees-shouldnt-fear-the-storm-in-utilities/
  5. XLU: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLU
  6. SJI: http://studio-5.financialcontent.com/investplace/quote?Symbol=SJI
  7. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  8. FMIHX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FMIHX

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