CWS Market Review – July 1, 2011

The first half of 2011 is now on the books and our Buy List had a very good showing. For the first six months of this year, our Buy List gained 7.27% which is a nice lead over the S&P 500 which gained 5.01% (or 5.0094%, to be precise).

(As a side note, let me add that I’m pretty impressed at how well the 200-day moving average served as a lower bound for the S&P 500. We had two bounces and a rally. The S&P 500 just closed above 1,320 for the first time in a month. Technical analysis may have little academic respect, but it’s oddly important because everyone else thinks everyone thinks it’s important.)

When we include dividends, our Buy List gained 8.13% compared with 6.02% for the S&P 500. Bear in mind that we did this without making one single change to our Buy List for the entire year. Absolutely zero trading.

Frankly, one of the smart moves we made is that our Buy List has a good weighting of healthcare stocks, and healthcare was the top-performing sector for the second quarter. It’s also the best-performing sector for the year so far. If our Buy List keeps delivering, 2011 will be the fifth-straight year that our set-and-forget Buy List has beaten the market. Once again, sloth and patience are an investor’s best friends.

Also, being well-diversified helped us out. Seventeen of the Buy List’s twenty stocks are up for the year while only Ford (F), AFLAC ($AFL) and JPMorgan Chase ($JPM) are in the red. Our top-performing stock for the year is Jos. A. Banks ($JOSB), which I never would have expected. JOSB is up 24.03% for the year, and that includes the stock’s big 13.3% one-day plunge from a month ago. Fortunately, the shares have recovered a little bit and they closed above $50 for the first time since the last earnings report.

For those of you keeping score, JOSB dropped over $11 after missing earnings by one penny per share. That’s 1,100 pennies lost due to a one-penny-per-share miss. I thought this was a dramatic over-reaction and the market apparently agrees. Now that JOSB has hit my $50 buy price, I’m raising it this week to $53 per share. JOSB is a good buy.

In last week’s issue, I highlighted Bed Bath & Beyond’s ($BBBY) great earnings report and higher guidance. The shares have rallied impressively ever since. Not only did BBBY take out its 52-week high from April, but the stock also broke $58 per share which was my new buy price from last week. The stock has managed to become our second-best performer for the year, up 18.76%. For now, I’m going to hold off raising the buy price. BBBY continues to be a very strong buy up to $58 per share.

The other stock I highlighted last week was Oracle ($ORCL). I feel vindicated because I said that it released a very good earnings report although the market dumped the shares in the very short term. During the after-hours session from last Thursday, Oracle got as low as $30. The shares have so far closed higher every day this week, and on Thursday ORCL came very close to breaking the $33 barrier. Thank you, patience and sloth! Oracle continues to be a very good buy up to $34.

I’ve also been impressed with how some of our quieter stocks have performed. Abbott Labs ($ABT), for example, is up nearly 10% for the year and that doesn’t include its very generous dividend (now yielding 3.65%). Wright Express ($WXS) is up over 10% in the last nine trading sessions. Johnson & Johnson ($JNJ) is inches away from a new 52-week high.

Now that the second quarter is behind us, earnings season will start soon. The upcoming earnings season has a very good shot of being an all-time record for the S&P 500. The previous record was set during the second quarter of 2007. Despite the fact that corporate profits are returning to the same level of four years ago, the S&P 500 is down over 12% over that same time. Furthermore, interest rates are much lower so you would expect earnings multiples to be higher, not lower.

Speaking of which, perhaps the most important event of the past few days has been the mass exodus out of the bond market. To be precise, this isn’t a new move in the market. Instead, it’s a sign that the dramatic reaction to the problems in Greece is slowly unwinding. What happened is that nervous investors crowded into trades like the Swiss franc and mid-term U.S. Treasuries. Investors also shied away from many financial stocks, and both AFL and JPM were causalities. Now that the worst fears are passing, these trades are fading as well. AFL, for example, just popped over $46. Most surprisingly, the euro is actually higher (!!) which I thought might never happen again.

Over the last four days, the yield on the three-year Treasury jumped by 24 basis points. The five- and seven-year notes increased by 36 and 37 basis points, respectively. That’s a very big move for such a short period of time. Some folks think this is due to the completion of the Fed’s QE2 policy. I doubt that. We all knew QE2 would end some day, plus the Fed will still be a big buyer of Treasuries.

What’s really going on is that investors are now more willing to take on more risk. The big beneficiary is the U.S. stock market. The four-day rally has added more than 4% to the S&P 500, and the index just closed at its highest level in nearly a month. This was our best four-day move in nine months. On top of that, this is a seasonally strong time of the year for the stock market.

Lately, Wall Street has had a tough time getting a good read on the economy. What happened is that a lot of economists had been overly optimistic with their economic projections. As a result, they lowered their forecasts. But now, the numbers keep topping those lowered projections. It’s a combination of over-reaction and reading long-term trends into only a few points of data.

The upcoming ISM report, which comes out Friday morning, and next Friday’s employment report will tell us a lot about where the economy is headed. If these numbers are strong, I think the third quarter will be a very good one for stocks and our Buy List.

Be sure to keep visiting the blog for daily updates. The stock market will be closed on Monday for July 4th. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Posted by on July 1st, 2011 at 6:45 am

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: , ,