The next big ‘thing’
By Daniel at 2 September, 2008, 7:26 am
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The next big ‘thing’
Commentary: Heed the cycle or follow the trend?
By Kelley Wright, Investment Quality Trends
Last Update: 9/2/2008 12:01:00 AM
LA JOLLA, Calif. (MarketWatch) — The stock market has its own lexicon, which
could sound like a foreign language to the untrained ear.
This is probably true for any group of enthusiasts who get together to discuss
their particular passion, whether it’s hot-stove-league baseball, fantasy
football or underwater basket weaving. However, there’s a danger with
familiarity, as a kind of laziness can develop in which terms with totally
different meanings become interchangeable. Take “cycles” and “trends,” for
instance.
A cycle is defined as “any complete round or series of occurrences that repeats
or is repeated,” according to Dictionary.com. A trend, on the other hand, is
defined as “the general course or prevailing tendency.”
Cycles generally cover long periods of time. For example, the periods from 1929
to 1942 and from 1966 to 1982 were structural bear cycles. The periods from 1942
to 1966 and from 1982 to 2000 were structural bull cycles. No market goes
straight up or straight down, so all long-term cycles experience short- to
intermediate-term countertrends. In the 1942 to 1966 cycle, for example, there
was almost a three-year bear countertrend from 1946 to 1949.
While there is no clear consensus, many believe the market break in 2000 ushered
in the next long-term bear cycle, with the period from late 2002 to October 2007
as the first of many countertrend bull rallies. Time and space prohibit a
substantive discussion of that argument.
Clearly, however, specific sectors, such as pharmaceuticals, have been in decline
since 2000, even though the overall market was moving higher between late 2002 to
last October. In an entirely different market sector, General Electric (GE) has
exhibited similar price action as pharmaceutical stocks.
Part of the work we do at Investment Quality Trends is to monitor changes in the
percentages of stocks we follow within our four categories of value based on
dividend yield: Undervalued; Rising Trends; Overvalued; and Declining Trends.
When we first published in 1966 (an interesting time to start an investment
newsletter, at the beginning of a major bear market), the Undervalued category
was in a decided uptrend until the bull countertrend in 1971 and 1972.
When the bear really picked up steam in ‘73, the Undervalued category grew
through 1982 and, for most of that period, represented over 80% of our universe.
When the great bull market began in 1982, the Undervalued category quickly
declined as those stocks moved into their Rising Trends and eventually reached
Overvalued in 1998.
From 1998, with a brief interlude from 2000 through 2002, the Overvalued stocks
shifted to Declining Trends through year-end 2004. Since early 2005, the
Undervalued category has been in its first substantive uptrend since the
1973-1982 time frame and once again is our largest category.
While it remains to be seen if we will mirror that ‘73-’82 period, our universe
of high-quality, dividend-paying blue-chip stocks are building cyclical value.
Our view, then, is that we are in a structural bear cycle. We further believe
that tangibles, oil, gold and other commodities are in structural bull cycles. We
also believe, however, that a cyclical bull countertrend, possibly a powerful
one, is setting up.
For the long-term cycle, we see Archer Daniels Midland (ADM) as offering historic
good value. Barrick Gold (ABX) is our favorite in its sector and also offers
excellent historic value. If oil corrects further and you can pick up Chevron
(CVX) at $82 or better, consider doing so.
Playing the bull countertrend rally
For the bull countertrend rally and beyond, which could develop just before or
after the election, we think there may be a generational opportunity to acquire a
multitude of classic value stocks at prices and dividend yields we may not see
again for many, many years.
In no particular order, we would suggest the following for consideration: Altria
Group (MO), Automatic Data Processing (ADP); Coca-Cola (KO), PepsiCo (PEP),
Colgate-Palmolive (CL), Procter & Gamble (PG), General Electric, Cardinal Health
(CAH), United Technologies (UTX);and AT&T (T).
In the financial arena, which is still a mine field, we feel Bank of America
(BAC) and Wells Fargo (WFC) will not only survive, but prosper. In the regional
bank area, BB&T Corp. (BBT) and SunTrust (STI) offer good historic value and
potential takeover possibilities.
Cycles and trends will come and go, but at the end of the day, we hold to two
basic beliefs: There is no profitable substitute for quality, and, when values
become present, as measured by historic dividend yields, carpe diem.
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