Monday, December 7th, 2009
Gilmo Report: A ‘meat-and-potato’ market
Kevin Marder at the Gilmo Report sometimes shoots through his market reports to me. They are usually excellent reading. He called the start of the new bull market well and even had insights into its true nature — ie don’t expect perfect set-ups after such a severe bear market.
The Gilmo Report is run by Gil Morales, who was a former trader for William O’Neil. Their stuff is good because it combines hard-core practical trading experience with broader macro perspectives.
Marder’s latest report is particularly interesting. Here are a few points I took out of it:
* Marder says the market is showing signs of weakness – six distribution days in October, hitting new highs on light volume, a narrowing of breadth with a shift to larger caps and a decline in new highs.
* He says this bull market hasn’t been fueled by growth stocks, rather by companies with ‘meat and potato’ products. “In many cases, these stocks do not possess sparkling fundamentals or innovative products or services, as much as they offer the value crowd the ability to buy stocks that had been severely bludgeoned in the bear market,” he said. “As a result, for the growth stock specialist, it is still a challenge to find recession-resistant candidates expected to grow earnings by 25%+ in ’10, let alone those considered institutional quality.”
* Marder expects “basic resource issues” – steels, ores, papers, chemicals, etc – to take over leadership of the market and continue where they left off in 2007. They will be driven by the “dominant secular trend” – “that of roughly 2 billion individuals entering the middle class worldwide – (which) will for a number of years drive the market’s biggest-winning stocks.”
* Marder doesn’t like the health of the brokers, “a group that has often topped some months in advance of the averages at the end of a bull market.” “We do not like the look of its RS line,” he said. “If this was 18-24 months into a bull market, it would be expected. But nine months into a bull appears more ominous than we would prefer. The brokers are similar to the advance-decline line and new-high figures in that the group tends to act as a good longer-term leading indicator of a future top in the averages.”
* Despite the negatives Marder doesn’t believe the market will fall off a cliff just yet. “The view here is that based upon historical precedent in the areas of 1) secondary corrections (the average bull market experiences more than one 8%-12% intermediate-term correction, while the current bull has only had one), and 2) breadth divergences (the broader market tends to peak a number of months ahead of the averages, especially so with a market as powerful as this one), the probabilities do not favor the onset of a bear market at this juncture, but an eventual leg of upward revaluation.”
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