NOTE: Every week or two I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a time delay from time to time.
Originally sent to clients Monday, October 17.
How things have changed since I wrote “The Case For A 4th Quarter Rally” less than two weeks ago. At that time, the S&P had just closed at a new low for the year and many were predicting an imminent breakdown in the market. Instead, the market reversed powerfully two Tuesdays ago and has levitated since with the S&P up 150 points (14%) from its intraday low.
At this point, things may have moved a little too far too fast. Technically, we are back at the top of the range that has snuffed out all rallies since August. Further, volume dropped off notably last week with NYSE Composite volume down 27% from the week before. In fact, not a single day’s volume last week was above the 50 DMA and 4 days were more than 20% below it. That is a thin market susceptible to being pushed higher by momentum traders and hedge funds trying to wring every last point out of the rally.
I am still constructive on the market through year end for the technical and seasonal reasons I outlined in “The Case For A 4th Quarter Rally”, but I would wait for a better entry. If and when it presents itself, I like tech as a way to play any year end rally. While financials are the most oversold and cheapest, they are also the riskiest. By contrast, the tech sector has very little debt and a higher quality of earnings.
Technically, tech has had excellent relative strength of late. Indeed, the S&P Tech sector is flat since July 1 compared to -8% for the S&P 500 as a whole and -20% for the S&P Financials.
Cramer was persuasive in pounding the table for tech over the financials on last Thursday’s Mad Money.
My personal favorites in the tech space to play a 4th quarter rally are Cisco (CSCO) and Hewlett Packard (HPQ). Fundamentally, both of these stocks are extremely cheap with Cisco trading at 7 and HP 5 times trailing earnings. Technically, both have put in solid lows in the last couple months. As a result, they offer a compelling way to play the seasonal tailwinds into year end with a nice margin of safety.
Here is the performance for the 3rd quarter:
Top Gun: +1.17%
DJ Total: -15.72%
And Year-To-Date (through Sept 30):
Top Gun: -3.21%
DJ Total: -11.42%
NOW IS THE TIME TO INVEST WITH TOP GUN: If you have been thinking about investing with Top Gun, now is a good time to give me a call or send me an e-mail.
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