Issue #7 - 3/05/08
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"It is interesting that the industry has invented new ways
to lose money when the old ways seemed to work just fine"
John Stumpf CEO, Wells Fargo Bank
Quoted from Berkshire Hathaway's Annual Report
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See Note below for chart explanation.
Editor's Corner
A Saw-Tooth Market?
Ron Rowland - Editor
The equity markets underwent a stressful downdraft last week, taking the S&P 500 from the top end of its recent trading range to the bottom end in just four market days. On an intraday basis, the S&P 500 swooned -5.8%, forcing even the calmest long-term investors to take notice. A retest of the January lows is currently underway. For most equity markets, the closing lows of January have been approached but not breached.
The market often moves in a nonsymmetrical saw-tooth pattern with the predominant market direction being identified by the side of the tooth lasting the most days. In other words, the pattern in bullish markets typically consists of a long upward move followed by a short downward move. Last October, the pattern became bearish with longer downward moves and short upside interruptions. Since late January, the saw added two more teeth. They are both of the bullish variety with the upward move of the tooth lasting more days than the downward move. Such patterns are not fool proof, and the next tooth can always be the opposite shape, but for now, it gives the bulls one more reason to believe that the worst is behind us.
Sectors
Over the course of a full market cycle, most economic sectors display relatively low correlation to each other. However, this is often not apparent during short-term events such as last week when all major market sectors lost momentum. Each sector was negatively affected to various extents by the overall market decline. However, relative strength was not impacted. The commodity-oriented sectors of Energy and Basic Materials remain the strongest.
The poor performance of the Financial Services sector received the most press coverage, but there is another sector that has actually been performing worse and has escaped media attention. The Telecommunications sector is down more than -20% year-to-date and off nearly -30% the past six months. It's lost nearly a third of its value since last July. The two largest stocks in this sector, AT&T (T) and Verizon (VZ), are holding their own, but Sprint Nextel (S) is off more than -70% from its 52-week high and dragging the sector index down in the process.
Styles
Not much change in our style rankings this week. Mid-Cap Growth and Large-Cap Growth continue to be the best performing corners of the style box.
International
Latin America and Canada, two commodity and natural resource stalwarts, remain atop our global rankings. It is interesting to note that Japan is creeping upward on a relative strength basis, but its performance on a longer-term chart looks absolutely terrible. Sometimes you have to look beyond the rankings to see the bigger picture.
Note:
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
Pick of the Week
Time to Jump On Board With Steel: NUE
Brandon Clay
We've been watching this one for three weeks. Ever since the big breakout at $64, Nucor Corporation (NUE) has been on a tear. Our only regret is not going with it earlier. Still, we're convinced the ride is far from over.
Here's why we still like Nucor...
1) Steel's Rally is Just Beginning
According to Barrons (3/3/08), the demand for steel has grown faster than supply for the past six years. If you know anything about global growth you understand the importance of steel. That's another reason steel spot prices are up 40% since October. Because the global inventory is low, "buying acceleration" appears to be happening. Since Nucor is a steel company, they stand to profit from the continued global surge in demand for steel.
2) NUE Eyeing Growth for the Future
Last month, Nucor signed a purchase agreement to acquire SHV North America Corporation, which owns David J. Joseph Co. (DJJ) for $1.44 billion. DJJ processes ferrous scrap metal allowing NUE to increase sales and production. The market likes NUE's long-term outlook. Since then, the stock jumped +21%. We think there's room for more.
3) NUE Chart Suggests More Growth
With such a strong close today, Nucor seems poised for another climb up the chart. Taking out last Wednesday's high, NUE closed at $69.45 today. Tomorrow's open should be a good entry point. Don't be too surprised about some bumps along the way. Stocks moving this much sometimes pause to catch their breath. Still, we think NUE is ready to climb again.
All the best.
Note:
Keep in mind that the Pick of the Week is usually intended for aggressive investors. Don't risk money you can't afford to lose. You will need to decide when (and if) it is time to sell.
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DISCLOSURE
© 2008 AllStarInvestor.com All Rights Reserved. Protected by copyright laws of the United States and international treaties. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. All Star Investor employees, its affiliates, and clients may hold positions in the recommended securities.
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