Head Fakes Galore From Mr. Market

by Richard Band | July 11, 2012 10:00 am

See why I urged you to wait?  A week ago, stocks were acting hale and hearty.  The bulls were toasting the latest European summit—100 billion euros of virtually strings-free aid for Spain.  But the euphoria quickly faded.  The past four sessions have put equities back under heavy selling pressure, knocking a cumulative 290 points off the Dow.

In this environment, Mr. Market is making more than his usual number of head fakes.   And that’s a reason for greater than usual caution.

As I suggested in the July newsletter (and in several recent posts), the 1350 area on the S&P 500 index is shaping up as a major battleground.  It’s roughly the half-way point between the market’s April high and June low.

In late June, the S&P surmounted 1350 and looked as if it might be able to defend its gains.  With Tuesday’s setback, though, we must allow for the possibility of some further downside testing.  Accordingly, I advise you to slow the pace of your buying until we see firm technical evidence that the sellers have exhausted themselves.

When you do nibble, focus on undervalued blue chip industrials like Dover (NYSE:DOV[1]) and Emerson Electric (NYSE:EMR[2]).  In recent days, both companies have reported a slowdown in orders from Europe—no surprise, really, given the economic turmoil over there.

All the same, it’s encouraging that both DOV and EMR still expect to log record profits for the current fiscal year.  These are thoroughbreds with long-term staying power (excellent managements, lean cost structures, solid balance sheets).

In other news affecting our portfolio companies, Wellpoint (NYSE:WLP[3]) announced a $4.9 billion bid Monday for Medicaid-benefits manager Amerigroup (NYSE:AGP[4]).  The move makes a lot of sense strategically, since state Medicaid programs in general are set for rapid growth now that the Supreme Court has affirmed the constitutionality of the Affordable Care Act.

I’m somewhat miffed, though, at the price tag of the deal—a 43% premium over AGP’s closing share price July 6, the last business day before the deal was announced.  While I still believe Wellpoint stock will generate market-beating returns over the next few years, I’m trimming my buy limit.

I continue to predict that the next major swing, for the entire complex, will be upward—and probably by a bigger percentage than most observers expect.  If anything, events of the past month show the world’s central banks more determined than ever to print money so that debt-strapped governments (from Spain and Italy to Japan, the UK and the USA) can keep servicing their obligations.

Until the monetary inflation stops or at least slows down, you’ll want some kind of hedge against the steadily dwindling purchasing power of paper currencies.  Market Vectors Gold Miners ETF (NYSE:GDX[5]) rates a buy.

For aggressive investors, Market Vectors Junior Gold Miners ETF (NYSE:GDXJ[6]) merits a buy with  a downwardly revised limit.  Just remember that gold-mining stocks are volatile.  A little “hedge” goes a long way.

  1. DOV: http://studio-5.financialcontent.com/investplace/quote?Symbol=DOV
  2. EMR: http://studio-5.financialcontent.com/investplace/quote?Symbol=EMR
  3. WLP: http://studio-5.financialcontent.com/investplace/quote?Symbol=WLP
  4. AGP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AGP
  5. GDX: http://studio-5.financialcontent.com/investplace/quote?Symbol=GDX
  6. GDXJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=GDXJ

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