Don’t Let the Recent Surge Give You Amnesia

by Richard Band | January 4, 2012 10:40 am

It’s a new year — forget the old! After the nerve-wracking year we’ve just had, investors seem entitled to a little therapeutic amnesia. In that light, yesterday’s brisk rally in global stock markets (including a 180-point surge for the Dow) makes perfect sense.

As usual, there was some cheery news to justify the buying. Two purchasing managers’ surveys overseas, released Monday, showed a return to growth in China’s manufacturing sector and a smaller contraction in Germany’s.

Then, Tuesday morning, the Institute for Supply Management issued its monthly report on U.S. manufacturing. According to the purchasing execs polled, the nation’s factories revved up a bit in December, with the ISM index climbing to 53.9 — a six-month high.

A reading over 50 indicates expansion, so the ISM report is clearly a favorable near-term omen for the U.S. economy.

On the other hand, as the chart here[1] illustrates, the ISM remains well below the 60-plus levels it achieved in 2010 and 2011. Thus, it’s still likely that the next few months will bring, at best, moderate growth — no recession, but no boom either.

Stocks can rise somewhat further in this climate, probably to the 1300 area on the S&P, or slightly higher. However, I advise you to exercise the utmost discipline with new purchases. Don’t chase stocks that have jumped sharply in recent days.

Take Barrick Gold (NYSE:ABX[2]), for example. Since last Wednesday’s intraday low, the shares have gained 8%. While ABX is still below my official buy limit of $48, I think investors can catch the stock at $47 or a tad lower sometime in the next week or so. My strategy is to be patient and then pounce. Also, I’m no longer considering a possible sale of ABX in the mid-$50s. It looks as if gold has formed an important low in the past few weeks. If so, prices for gold-related assets, such as mining shares, may be headed substantially higher in 2012. So, I don’t want to sell ABX too soon.

If you’re looking to put idle cash to work right now, I suggest bonds, particularly emerging-markets debt. iShares J.P. Morgan U.S. Dollar Emerging Markets Bond Fund ETF (NYSE:EMB[3]) invests exclusively in government debt, which tends to be safer than corporate IOUs.

Moreover, EMB follows an “intelligent”[4] asset-allocation strategy that automatically skews the fund’s portfolio toward better-quality issuers. Current yield: 4.9%.

On the sell side, it’s time for me to get rid of Gabelli Multimedia Trust (NYSE:GGT[5]), a closed-end fund that lagged the market badly in 2011 after mounting a respectable recovery in 2009 and 2010. Media stocks are highly sensitive to the economy, so we don’t want to hang on to GGT after the market’s current burst of strength fades.

  1. here:
  2. ABX:
  3. EMB:
  4. “intelligent”:
  5. GGT:

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