You can’t ask for a nicer party to kick off those lazy, hazy, crazy days of summer! Stocks soared yesterday, with the Dow’s 110-point jump understating the percentage gains racked up by the broader market. As I suggested in last week, all it took was a hint of a resolution to the Greek debt crisis, and the short sellers ran for cover.
Is this the beginning of a runaway move to the upside? Possibly. (Tuesday’s lopsided breadth numbers, with more than five NYSE stocks advancing for every decliner, are typical of what you see when a major rally is lifting off.) But I counsel patience.
Remember, the road map I gave you last week called for a fairly vigorous bounce for a week or two, taking us back to the 1,315 to 1,330 zone on the S&P 500. Then the market should pull back to the area of the June 15 trough (1,265), testing the low and probably breaking it by a marginal amount.
That’s how strong, durable stock market bottoms are normally formed.
Until we get some sense that the market is taking another path, I’m going to stick with my original scenario. In other words, we’ll keep buying in here, but more cautiously as the indexes rise.
As for mutual fund investors, yesterday’s bounce took the S&P above our limit (1,281) for buying aggressive funds. However, you’re still OK to accumulate conservative funds such as FMI Large Cap (MF: FMIHX), Gabelli Equity Income (MF: GABEX) and Oakmark (MF: OAKMX). From here, I envision a total return of 10%-15% on all three funds by year-end.
Over in the bond market, shares of Invesco Mortgage Capital (NYSE: IVR) felt some downward pressure yesterday when the REIT issued 17 million shares in a secondary offering. I view this as a temporary supply/demand imbalance, nothing more.
If you don’t own IVR, you can now lock in an astounding 18.5% yield, based on the most recently declared quarterly dividend of 97 cents. To be sure, IVR is suitable only for the most aggressive piece of your income portfolio. This is, after all, a fund that invests in mortgage paper (and uses leverage — borrowed money — to boot.)
But my calculations suggest that IVR should be able to keep throwing off a double-digit yield even if the Federal Reserve boosts short-term interest rates by 2%-3%. So there’s a fair margin of safety here, as long as the fund’s managers continue to select mortgages with reasonably low default rates.
