Virginia shudders and shakes, Hurricane Irene creeps up from the Bahamas, new-home sales for July fall flat. No matter: Stocks rocketed yesterday, with the tech-freighted Nasdaq surging the equivalent of 465 Dow points. As fear faded, gold plunged, off $30 an ounce in the regular Comex session, and another $25 in electronic after-hours trade.
What caused the mood of the markets to turn on a dime? It certainly wasn’t the day’s news. Instead, traders seem to be betting that Federal Reserve Chairman Ben Bernanke will pull another rabbit out of his frayed old top hat when he addresses the central bank’s annual Jackson Hole, Wyo., conference Friday.
Last year at this time, Bernanke used his Jackson speech to announce a fresh round of “quantitative easing” (bond purchases by the Fed). Wall Streeters picked up the theme and bought stocks like crazy in the final months of 2010.
Looking back, we can see that QE2 did very little to stimulate economic growth. Ultimately, stocks gave up three-quarters of the ground they had gained between Jackson 2010 and the April 2011 market peak.
Hope springs eternal, though, so it wouldn’t be much of a surprise if today’s rally grew legs. Within a few weeks, the bounce could carry the S&P 500 back to the 1,250 area, where the breakdown occurred in early August. That’s where we’ll stop, look and listen — and maybe do some selling or hedging.
For now, I suggest adopting a trader’s mindset with regard to any of your new stock or mutual fund purchases. Assume you’ll be looking to scalp a profit just a couple of weeks from now.
If the fundamental background genuinely improves, you may be able to convert your “trade” into a long-term holding. But don’t get too comfortable. The U.S. and European economies are skating close to the brink of recession. As investors, we must remain on high alert until the threat passes.
Among my model portfolio companies, Plains All American Pipeline (NYSE:PAA), gave a wonderful opportunity to buy Tuesday morning at prices as low as $57.09. By the end of the session, anyone who got in before noon (EST) was sitting on a nice paper profit.
Keep accumulating this master limited partnership up to $63, preferably on down days for the share price. Current yield: 6.7%, mostly tax deferred.
For a hedge against market turmoil, I’m still keen on Barrick Gold (NYSE:ABX). With the recent jump in gold prices (up 22% since the end of June), miners like ABX will be reporting huge profit gains for Q3 and likely Q4 as well.
The consensus estimate for Barrick’s 2011 earnings ($4.62 per share) probably is too low. Even if it’s correct, however, ABX is trading at a P/E of only 11X, just about the lowest forward multiple for the stock in the past decade. And this in the midst of a gold boom of historic proportions!
Buy ABX on a dip to $49 or less. I’m targeting $58 to $62 within the next 12 months.
