The Rally At Last

I’ve been saying for two months that we’d get a November-December rally in the market. At last, November is here and the rally is right on schedule. The Dow gained 1.2% this week and the Nasdaq gained 3.8%, its best weekly performance in 14 months. Our winter rally is under way.

You can feel the change in tone. Just last week the focus was on negatives. This week it was on positives. There were a number of glowing articles about the immediate future of stocks. Typical were these comments by David Callaway, editor-in-chief of CBS MarketWatch:

With oil futures now below $60 a barrel, corporate earnings running better in the third quarter than the second, and the Federal Reserve Board at least nearing the end of its year-and-a-half rate increase cycle after indicating that inflation remains contained, conditions are ripe for a year-end market rally. There’s a lot of pessimism out there right now about the market heading over a cliff. Maybe it’s just the holiday air, but it seems to me it’s already been to the edge and now is heading back. We’ve had our disasters for this year already. Look for the markets to end higher in 2005 on a strong year-end rally.

October same store sales for retailers were strong almost across the board. Wal-Mart reported at 4.3%, well above the 2% to 4% range they had originally forecast. Costco reported an incredible 10.0% increase, also above expectations of around 8.5%. Target then added to the healthy climate with a 5.7% gain, also above the expected 4.8% increase.

Even smaller specialty chains reported strong numbers. American Eagle had a 17.3% increase, Chico’s FAS 17.9%, Gymboree 18.0%, and Nordstrom 6.4%. All beat expectations. It was impressive, to say the least, both in terms of good gains as well as beating expectations.

Alas, the American consumer is not dead after all and the holiday season may prove to be a profitable affair. This will help two of our holdings, Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free.. Indeed, both have begun their upswing already.

Before that, some good economic news. New claims for unemployment for the week ended October 29 were a low 323,000, and of that 18,000 were hurricane related. Underlying claims are near 300,000, which reflects a strong job market. Third quarter productivity was up 4.1%, a strong gain that helps keep inflation in check by keeping unit labor costs low.

The Federal Open Market Committee voted unanimously to raise the benchmark federal-funds target rate by a quarter-percentage point to 4%, putting rates at their highest level since June 2001. Economists expect the Federal Open Market Committee to continue hiking rates by a quarter-percentage point at the two meetings left before Fed Chairman Alan Greenspan retires on Jan. 31. In fact, making his last testimony in front of the Joint Economic Committee this week, Greenspan said that while the economy is retaining “important forward momentum” as economic fundamentals remain “firm,” “uncertainty surrounds the outlook for inflation,” words that confirmed the Fed will continue to ratchet-up rates.

The big question now is whether incoming chairman Bernanke will put the lid at 4.5% or keep going up to 5%. If you know the answer, let me in on it.

We sold Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. on Monday for a 1% gain just before it plunged 11% on Tuesday. That looked brilliant until Wednesday when it spiked up 18%. I missed the one-day chance to get back in under $100, which was my re-entry price target. The stock closed the week at $114. I’ll keep watching and hope to find a good re-entry.

We bought Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. on Thursday for $13.90. I had hoped to get it at $12, but buying into Japan now is all about buying into the momentum of a fast-recovering economy. I paid more than I wanted to pay for Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. as well. More often than not, lower prices are left in the dust. To wit, these two closed the week at $14.07 and $49.32, putting us up 1.2% and 4.5% respectively so far.

The third stock I’ve targeted to round out our Japan recovery portfolio is financial firm Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free.. I intended to get it at $90, then thought it’ll never reach there so I’ll raise the bar to $95. Then on Friday, it rocketed up 11.46% to close the week at $109.50. See what I mean? They just keep marching higher. We may get a little settling back next week, but probably not much. I’ll keep you posted as to if and when to buy.

A new potential buy came onto my radar screen this week when Symantec disappointed with its earnings numbers and announced that one of its executives was departing. It looks like there might be genuine trouble at the firm, but its implosion unfairly took competitor Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free. down 13% to $26 on Tuesday. It’s a leader in the growing anti-virus and cyber protection market which has a bright (grim?) future as the internet proliferates and more of our lives get wound up in computers. It boasts a 14% profit margin, a P/E of 19, annual revenue growth of 14%, and a $1.2 billion cash hoard. The stock closed the week at $27.58. I’d like to get in below $27.50. Stay tuned.

This week, our stocks did well. Various holdings rose 1.5%, 4.5%, 1%, 3.4%, 4.1%, 2.1%, and 3.4%. Our primary strategies also did well. Double The Dow rose 1.7% and Maximum Midcap rose 4.1%.

Then there’s Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free.. The stock closed the week at $3.36, putting us down 21% so far. We’ll double down at $3 if it gets that low. Several of you have written asking what I see in this dud. Fair question.

Without a doubt, it is beleaguered. The profit margins are negative, the growth is slipping, and it seems to forever lose ground to superior competitors Investments are shown only to KELLY LETTER subscribers. Click to try the letter for free.. What we can say in its favor is that it’s cheap. Its price-to-sales ratio is just 0.21. Thus, we are not buying a great company like Coca-Cola. We are buying a technical stock opportunity. That means that the stock looks ripe for a solid rebound as news improves around it. The computer storage industry is consolidating for a move higher once inventory issues are worked out. When that happens, the rising tide should lift all boats and it will lift this stock, in terms of percentage gains, the most. Going from $3 to $6 is a 100% gain and would still leave the stock cheap compared to its competitors. Further, who knows, they might even improve their margins and become an honest recovery story. If so, the stock could conceivably get to $12 or $15. That’s a long shot, though.

What is not a long shot is that the improving industry takes all competitors up a few bucks. A few bucks from $3 is a 100% gain. That’s exactly what happened in last year’s rebound cycle. Have a look at th
is one-year chart:

(Chart shown to The Kelly Letter subscribers.)

It shows that from last November to June, our stock gained 100% while its main competitor gained only 65%. Neither is anything to sneeze at, but our stock significantly outperformed purely by virtue of departing from a lower price. I expect to see something like that unfold again, hence the holding at these depressed prices and the plan to buy more at $3.

I’m happy to see the winter rally arriving on time. Your patience over the past two difficult months is about to pay off.

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