Will the Bulls Get Their Way?

by Richard Band | September 12, 2012 11:16 am

Big market-moving news looms.  Today the German constitutional court is slated to rule on whether the country can participate in the permanent euro-area bailout fund.  Thursday, the Federal Reserve may tip its hand on another round of “quantitative easing.”

Wall Street is sniffing a friendly outcome in both cases.  Tuesday, the Dow gained[1] 69 points to close at its highest level since December 2007.  The euro bounced nearly a penny to finish the session at a four-month high.

Quite possibly, the bulls will get what they want — and equities will climb further.  No law says an overbought, overextended market can’t become even more overbought and overextended.

However, stocks have now reached the 1430 to1450 resistance zone (basis the S&P 500 index) that I flagged in the September newsletter.  Our goals for the second-half rally have been achieved.

At this stage, it makes sense to throttle back on our buying until either (1) another meaningful pullback occurs, or (2) some of the technical divergences I’ve talked about in recent blogs are erased.

In my August 21 Journal, I called your attention to the Value Line Geometric Index[2], which peaked for the current cycle in April 2011.  Over the past three weeks, since that blog, the equal-weighted Value Line (a handy proxy for the great mass of U.S. stocks) has climbed a bit further.  However, it remains below its March 2012 crest as well as, of course, the higher April 2011 top.

Not a healthy sign.

Another index I’m watching is the London FTSE 100.  For many decades, the London stock exchange has tended to form major peaks either precisely in line with New York or, more often, a few weeks to a few months ahead of New York.

As you can see from this chart[3], the FTSE topped on February 17, 2011—almost 19 months ago.  Like the Value Line, Footsie has also thus far failed to better its spring 2012 peak.

If FTSE, Value Line or both can break above their 2012 highs, I’ll breathe a lot easier.  For now, though, I advise an extra measure of caution.  Limit your buying to stocks like California Water Service (NYSE:CWT[4]) and Coca-Cola (NYSE:KO[5]) with proven defensive characteristics.

On the sell side, I’m cutting loose one of our Cash Gushers, Invesco Mortgage Capital (NYSE:IVR[6]).  I don’t see any immediate clouds on the horizon for IVR, but the stock is now trading at a 13% premium to book value—rich for a leveraged mortgage REIT.

Since my first writeup in the November 2010 newsletter, IVR has generated a 30% total return, all tracing back to the lofty dividend.  Let’s say thank-you and move on.

P.S.  At the end of this month, W.P. Carey & Co. (NYSE:WPC[7]) plans to complete its merger with CPA 15 and convert into a real estate investment trust (REIT).  If you own CPA 15 units, I advise you to hold the Carey shares you’ll receive in the merger.

Should WPC dip after the closing (as a result of liquidation by CPA holders), I may upgrade the shares to a buy.  For now, Carey rates a hold.

  1. Tuesday, the Dow gained: https://investorplace.com/2012/09/dow-parties-like-its-2007-tuesdays-ip-market-recap-ms-c-burby-casy/
  2. Value Line Geometric Index: http://finance.yahoo.com/q/bc?t=2y&l=on&z=l&q=l&p=&a=&c=&s=%5EVLIC&ql=1
  3. chart: https://profitableinvesting.investorplace.com/wcmedia/FTSE_9-11-12.png
  4. CWT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CWT
  5. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  6. IVR: http://studio-5.financialcontent.com/investplace/quote?Symbol=IVR
  7. WPC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WPC

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