Market Up 2.8% In First Two Weeks!

A strong start to the New Year has the market up 2.8% in just the first two weeks. Last week, quarterly earnings season began with Alcoa, JP Morgan, and Intel, all of which exceeded expectations. Earnings announcements will gain speed over the next few weeks and the early consensus is that the majority will show growth, although perhaps not the heady growth levels shown in 2010. We also saw acquisition activity from Duke Energy and DuPont, the latter a stock that we own in our portfolio. Buyouts are a sign that corporate America is feeling more confident in the economy and the recovery. The other significant development is market volatility which has dropped to very low levels as measured by the VIX at 15.5. That means fear in the marketplace has subsided as investors become more confident and take on more risk. Some will argue that low volatility suggests complacency which can set the stage for a correction. Frankly, the market has made a strong run since September 2010 and a small correction would not be surprising. However, we think the right approach is to stay fully invested and to ride out any short term fluctuations in what we believe is a longer term bull market. The other positive of low volatility is that option prices are relatively cheaper and that makes buying long positions far less expensive, whether that be for speculation or protection. As for trading, we sold one stock last week, Humana for a nice 27% gain. Humana is a quality company, but we think we can reinvest these proceeds into a stock that has better prospects for six month price appreciation. We are now 90% invested in both equity funds and plan to look for additional stocks to buy.

Momentum And Value (MAV Screen): Breakout Stocks To Buy!

What Stock Tips do we have? Our complete list of watch list stocks can be found on our website, along with our commentary, see the link below. We have twelve stocks on our watch list representing nine potential buys and three potential shorts. We have several semiconductor stocks on our watch list and would caution investors to avoid buying too many stocks in the same industry. Frankly, we try to limit our investment holdings to no more than 20% from any one industry, but generally try to stay closer to 10%. Getting this allocation right is important as stocks in the same industry tend to move in the same direction, which reduces diversification and increases risk. Also, we have three stocks as candidates for short selling, but would caution that short selling in a rising market can be very risky. These three stocks are all overpriced and have seen recent selling pressure, but a rising market overall can help provide support to these stocks. A less risky play would be buy puts or put spreads to play a downward move instead of shorting these stocks outright.

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