Preparing For An End-Of-Year Run-Up

At the end of April, following a dramatic march higher by the stock market, I wrote in Kelly Letter Note 17:

Since March 5, Double the Dow and Maximum Midcap are up 18% and 19% respectively. . . . This pace will surely slow down. . . . I think we’re in for a little more upside, but that we’ll be heading lower in the medium term.

That’s exactly what happened.

Now, we’re at the end of that medium term, and I’m changing my outlook. I think we’re in for a little more downside, but that we’ll be heading higher in the medium term.

Friday’s non-farm payroll data have people talking about recession as if it’s a foregone conclusion. While it’s true that non-farm payrolls turn negative in front of a recession, not every instance of those payrolls dropping has presaged a recession.

In fact, only 4 of the last 12 negative non-farm payroll reports have been followed by a recession.

The latest report is a curiosity in that 4,000 jobs were lost, but unemployment remains a low 4.6%.

The situation is just not that bad. Sometimes you look over the comments about the market and wonder at how young the writers must be — or at least how uninterested in recent history.

The sudden crash of 1987, the Mexican peso blow-up of 1994, the Asian Contagion of 1997, the implosion of Long-Term Capital Management in 1998, and 9/11 in 2001 all created dire headlines and talk of systemic shutdowns in the world’s financial system. Recession was supposedly around the corner in each case. It never showed up. It may very well blow off the party this time around, too.

Insiders bought at a pace greater than usual in August. That’s a good sign. Actually, it’s more than that. It’s one of the best signs you can find. Nobody knows a business better than the people running it, and the only time they buy shares of their company is when they think the price of those shares will rise. They’re usually correct.

The high volume of insider buying last month was a vote of confidence in the general stock market by people who know their separate pieces of it well.

Very encouraging.

Another thumbs-up is the lack of euphoria in the market. This year has looked nothing like 1999 when the internet was destined to change all the rules, thereby making bear markets a part of history. At least that bear market which followed made history — as one of the biggest we’ve seen.

Nope, people are pretty clear-headed these days. Nobody’s talking stocks on the street. I’m not collecting tips on airplanes the way I did in the late 1990s. The average guy and gal hasn’t piled into stocks.

Still another reason to open your wallet is that the market’s earnings yield is better than the yield on corporate bonds. That view shows the current stock market to be undervalued — right where you want it to be when buying.

There’s not a lot to this, actually.

The market has done well for a long time, did exceedingly well from last fall to last spring, was due for a pullback, got it, and is now dusting itself off for another run higher. It will not go straight forward. It will stagger to its feet, and then get going. That’s why I wrote above that we’ll have a little more downside.

For those who’ve been waiting to start a permanent portfolio, now’s the time. Do not put your whole nest egg in tomorrow. Be smart. Put part of it in now, part later, and make regular contributions thereafter. Volatility will not — and will never — go away. Take advantage of it by staggering your big money moves. I suggest Maximum Midcap as the best strategy.

While I think stocks are gearing for a push higher, I think the housing market has some more work to do on the downside. Last May I sent a report to subscribers that concluded there were no compelling bargains in housing yet. We’re a lot closer to those bargains now than we were then, making that conclusion a prescient one in retrospect. In the letter, I’m watching what I consider to be one of the best homebuilders for the long haul, currently deeply discounted but not yet cheap enough for us. It’s close, though.

We will most likely be witness to a good buying opportunity in real estate soon. If all goes as planned in the end-of-year stock market surge, money made in stocks could later be moved into bargain property prices for a double whammy of appreciation.

That’s exactly what The Kelly Letter (in paper form) navigated in the late 1990s, when dot-com profits were wisely redirected to low property prices before the two categories switched seats. We turned pennies to dollars, then used those dollars to buy houses priced in pennies.

Good times are on the way. Make sure you’re ready.

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