More Upside

It was a busy week in the market that ended net positive for us.

Tuesday provided the biggest stage show as Federal Reserve Chairman Ben Bernanke addressed the Joint Economic Committee of Congress. Worried that he’d signal an extended rate-raising campaign, the market dropped in advance of the testimony. Then, he seemed to say that the Fed might take a breather from its recent rate-raising habits.

That sounded good to all listeners and the market rose. Unfortunately, somebody mentioned that taking a breather is not the same as stopping altogether, and the market dropped on that collective epiphany. When the closing bell rang, the market was in the green by a slim 4 points.

Beyond the usual attention paid to the Fed, investors monitored earnings all week. In aggregate, the reports were encouraging. The first quarter ended well for most companies and guidance for 2Q was fairly upbeat.

For most companies, that is. The Big Kahuna, Microsoft, lauded in Barron’s just three weeks ago and summarized for Kelly Letter subscribers in Note 36, missed earnings expectations and warned that future earnings wouldn’t be as good as previously thought. That was Thursday night, and the stock dropped 11% on Friday. More below.

Yet, we had a great week in other areas. For the week, our student loan company gained 9%, our semiconductor maker gained 5%, our brewer gained 4%, our computer security firm gained 4%, and and our media company gained 3.5%. Last week’s losers remained this week’s losers; our computer maker lost 3% and our electronic retailer lost 4%.

Our permanent portfolios? Up again. So far this year, the Dow 1 is up 9% and Double The Dow is up 11%. Maximum Midcap dropped slightly, but is still up 16%. They remain the best-performing, simple long-term strategies. Kelly Letter subscribers invest more money each month after receiving reminder notes the day before it’s time to buy. The latest reminder note was sent last Thursday and we bought more shares in the strategies last Friday. The long-term performance of each of these approaches is fantastic, but Maximum Midcap’s recent strength becomes obvious in this table on my strategies page. I’m happy to continue showcasing this performer.

This week’s economic events did not divert attention from Bernanke’s testimony and earnings, but here’s what they showed:

On Monday, the dollar reached a three-month low against the yen. This trend is one that I warned about as a potential reason to sell the remainder of our Japanese market position. I think we’ll see another up-leg before getting to the seasonal troubles I’ve been warning about. I have a mental sight set on $77 as a sell price for the second half of our position. That would give us a +63% gain on the second half. Combined with our +37% gain on the first half, we’d net out at +50% on the entire position. The fund closed the week at $70.95, 9% shy of $77. Japanese markets are closed Wednesday, Thursday, and Friday next week for the Golden Week holiday.

On Tuesday, April Consumer Confidence hit 109.6, its peak since May 2002. March existing home sales hit 6.9 million, a 0.3% rise on the heels of February’s 5% gain. These are both good figures, evidence of a healthy economy. That’s what a lot of watchers don’t want to see. They want to see signs of weakness so the Fed gets the go-ahead it needs to stop raising rates. Tuesday’s numbers mean there’s more tinder to fuel the fires of inflation.

On Wednesday, durable goods orders for March rose far more than expected to 6.1%. That indicates brisk business investment and hints at economic growth. Then, new home sales for March leapt up 13.8%, the most they’ve increased in the last 13 years. February’s nearly 11% decrease was quickly forgotten among a chattering about reports of the death of housing being greatly exaggerated. Too, median home prices slipped 2%, the first time we’ve seen that in 27 months. Surely there’s no need to raise interest rates in light of that?

On Thursday, China’s central bank raised rates from 5.58% to 5.85%, its first increase since Oct. 2004. That came out of nowhere. Could global economic growth be on the down slope? The question alone gave some investors pause. The answer, per usual, stood us up.

Next week begins May. As the Stock Trader’s Almanac has made famous, the May through October time frame is the weak half of the year. The so-called “worst six months” have produced no gains in the Dow in the past fifty years. If my forecast of an August or September drop prove true, then the worst six months will continue their tradition.

After that, I expect things to improve. According to the May 1 issue of Barron’s, so do a lot of other investors. From the cover story:

In the latest Barron’s Big Money poll of institutional investors, 57% of respondents say they’re bullish or very bullish about the stock market’s prospects through the end of this year, up from 47% who held such conviction last fall. Nearly a third expect the Dow Jones Industrial Average to finish the year at or above 12,000.

Like us, a good many of those managers are looking to technology as the place to beat the market in the next 6 to 12 months. In fact, almost 43% said so.

I have fresh updates on our brewer, our debt collector, our student loan company, our chipmaker, our computer security firm, and our software company. I also spent some time examining a report from JPMorgan Private Client Services Economist Anthony Chan addressing the earnings slowdown we’ve been expecting since December.

To see all of these updates, the earnings slowdown report, and the entire Kelly Letter portfolio along with all subscriber notes sent this year, please try my one-cent, one-month trial. If you have a penny and a month with which to do some investment reading, it could be the most profitable penny you’ll ever spend.

I hope to welcome you soon!

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