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Tuesday, May 5, 2009
On March 20, I titled DailyWealth "A Dramatic Turn for the Better."
I laid out our True Wealth "script" for making money... with the conclusion that "Now is the time in the script that you want to buy stocks."
We hit the nail right on the head. And we're still "on script." In mid-March, I told my paid subscribers, "The entire market could rise by 50% from its lows last week over the next 18 months." We're already well on our way to seeing that prediction come true. The important thing to understand now is this:
Things are getting less bad.This is when the big money is made in stocks.
You've heard me say this before. It's not when things go from OK to good, or good to great. The big, fast gains come when things go from bad to less bad.
This concept is simple. But it's the path to big money. So... it's time to add some speculative positions.
Most investors won't be willing to do this... They'll be afraid things have run too far too fast. (I agree a small correction will be normal and healthy, but we can't know the timing of that.) The investor fear out there now is good for us. Perversely, we need skepticism to have room for stocks to rise higher. Once no one is scared anymore, the rally is over.
The reality is, many stocks are still very cheap. And the last two months have given us the start of an uptrend. The skepticism we're seeing now that the rally has to end gives us the three things we like to see when we invest: Stocks are cheap, investors are fearful, and we have the start of anuptrend.
Buy today, and try not to get caught up in the day-to-day gyrations. They'll drive you nuts. If we could close our eyes, snap our fingers, and be transported to the summer of 2010, I think we'd end up thankful we bought stocks today.
So let's see where we are in the True Wealth Script for Economic Recovery...
According to our Script, corporate bonds always bottom first.
They bottomed on October 10, as measured by shares of LQD (which is an index fund of "investment grade" corporate bonds). Shares of LQD are so high now, chances are excellent the October bottom was the "real" bottom.
Copper was next, bottoming in December. It dropped as low as $1.25 a pound. Today, almost unbelievably, it's nearly a dollar higher than that. It's been a huge move. Like in corporate bonds, chances are excellent the low in copper has been hit for this cycle.
Following the Script, the stock market bottomed in March. Just like in corporate bonds and copper, we've seen a great rally in stocks. Stocks bottomed around 666 on the S&P 500 Index. Today, the index is up around 30%(!) from that bottom. Chances are very good we won't see new lows for a while.
The next things to come in the Script are 1) the end of the recession, 2) a return of consumer confidence, and 3) a recovery in housing.
But if you wait for these things to happen before you buy stocks, you'll be too late. You'll have waited too long.
We're seeing signs the recession might end sooner than expected. It appears things are going from bad to less bad – ever so slightly – in the economy right now. The big move in stocks in the last few weeks was proof you find the big money when things go from bad to less bad.
Looking ahead, my end-of-recession indicator stayed flat last month instead of falling. I'll take that as a good sign. If it turns up for three months in a row, we're definitely out of the recession. I'll let you know when that happens.
Consumer confidence usually recovers at the end of a recession. The latest numbers show consumer confidence was up slightly to 26 from a record low of 25.3. Again, that's less bad at least.
Also, the housing indicators I follow at this point in the cycle – housing starts, building permits, and the National Association of Home Builders sentiment index – all turned up significantly last month. Of course, they're all coming off ridiculous record falls.
It could be a coincidence that all of these things are less bad in the last month... The recession indicator and consumer confidence numbers were up just barely, and housing numbers are volatile. This could be just a blip up along the way down. Or it could be the real deal... The end of the recession could arrive sooner than anyone thought.
It sure feels like things are getting less bad right now... and you want to own stocks when you see that.
P.S. If you'd like my latest recommendations to play this "recovery rally" – including several safe ways to make at least 50% in the next 12 months – consider coming on board as a True Wealth subscriber. You can get started with a no-risk trial subscription here.
INTEL HAS COMFORTABLY BROKEN OUT TO $16 PER SHARE
On March 13, we wrote how a rally in Intel's stock would lead us to believe things were getting "less bad" in the world.
Intel is the world's dominant producer of semiconductors... the little "engines" that power everything from cars and coal plants to televisions and telephones. Its share price gives us an "unfiltered" look at what's happening in the economy.
When Intel began rallying in March, we pointed out the amazing predictive ability of the stock market and claimed, "What you see happen in the market today will be in the newspapers three to six months from now. If Intel works its way above $15, you'll be reading things like 'semiconductor demand falls less than expected' in September."
As you can see from today's chart, Intel has comfortably "broken out" to a new six-month high. And what's this? Last week, the Wall Street Journal reported that semi sales, while terrible in March, were "less terrible" than those in February. Intel is rising... sales are getting less bad... and the "long global recovery" trade is on...
In The Daily Crux