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II Insight 
5 January 2012

Welcome to the New Year. We are a little late with the December copy of the Investors Intelligence Insight so we thought we would roll out an early January edition, with some thoughts on the markets and a few trading ideas on the year to come. 2011 was a year for government bonds and defensive large-cap equities, the latter trend demonstrated by relatively strong performance of the Dow against other equity indices.

The defensive theme looks to have further to run, but no doubt there will be new sectors coming to the fore, and numerous trading opportunities in the meantime. The team at Investors Intelligence will be monitoring the charts to identify these as they arrive.

On the subject of defensive stocks, tobacco stocks are extending their gains. Here's Tarquin Coe's views on this sector:

"Our favorite equity sector in the U.S. for 2012 has to be Tobacco. That industry was one of the top performers during 2011, gaining 27.7%. We expect that kind of performance to continue. The top performer was “Retail Discount” but when you consider the high income from the tobacco group, tobacco would have come up trumps.

The P&F price and relative charts* for Tobacco are both trading at all-time highs. As the saying goes “the trend is your friend” and we see no imminent technical reason for these trends to reverse in the months ahead."

*Note - users of the Investors Intelligence website can plot relative P&F charts for any stock. Simply select "relative P&F"  on the right-hand chart toolbar.
 
Coupled to the rising trends, stocks in the group have the bonus of excellent yields. Altria (MO) pays 5.5%, Reynolds American (RAI) 5.4%, Philip Morris (PM) 3.9%, Lorillard (LO) 4.5% and
Vector Group (VGR) a whopping 9%.
 
Our pick of the bunch would have to be Vector Group (VGR) as it is the least overextended. The price chart maintains its primary uptrend off the 2009 low and it is only just above support from that trend. This year we would not be surprised if VGR were to test the 2007 high of $24.38 (its opens 2012 at $17.76). The stock also offers the fattest yield. This stock is already in our Investment Portfolio. Fresh ideas are presented daily in the US Hotlines and three times a week intraday in the Coe Report.
 

 

 

 

 

 


Keep an eye on Fed action. Factor this in (and add an election year) and the next 12-months could certainly surprise to the upside. The Fed has already spoken of its commitment to low rates going forward, and its plans for a new program of purchases of mortgage-backed securities. If this comes to pass, it will be foolish to swim against the tide (see overlay chart of S&P500 below). But, it is evident that the end of such periods results in the equity markets giving back a proportion of their gains. Intervention would be good news for equity investors, but don't forget to take profits.

And sentiment! Our Advisors Sentiment indicator is in fairly neutral territory, but creeping into overbought territory with Bulls standing at 49.5%.  Should we see a jump up from this level, it will be worth considering the reason for the move; the last round of QE saw advisors move en-masse to the bullish camp. This was a logical move on their part and we could expect the same kind of shift on further intervention. Thus, there may be no hurry to sell. Watch for extreme overbought levels towards the middle or end of the program.

You can learm more about our AS indicator here. This indicator has a nearly half a century of back-history and is considered by many professional investors to be the single best market timing tool on the Street.  


More fire-sales on government bonds?  US Treasuries (and TIPS) performed strongly in 2011, but possibly the best performing single asset class was UK Government Bonds, known in the market as “Gilts”. A sluggish UK economy, combined with flight-to-quality inflows from Europe powered the ten-year benchmarks to a total return of around 15%.

Will this bull market continue? Perhaps, but investors should consider the fiscal situation in the UK. European bond markets such as Italy, Spain and even France have seen sharp sell-offs in their bond markets. Could the European crisis of confidence spread to the Gilt market? Consider that government's budget is reliant on growth to pull the country out of the deficit funding spiral, and that this growth is proving elusive. Should the situation deteriorate further, the inflows that have been propelling gilts higher may evaporate.

If this unwelcome scenario emerges, how should the UK investor react? We suspect that at some point in the year, a sharp countertrend move will be seen. The chart shows the yield for ten-year gilts (yield and price move inversely) and the falling 100-day EMA looks to be the guideline for this trend. For the moment, we would run with the bullish trend in Gilts, but watch to quickly stop-and-reverse this trade on signs of a deterioration.

For more on the UK bond market, please see our sister website at www.fixedincomeinvestor.co.uk. For international coverage please see our Investors Intelligence Fixed Income Hotline.   


A sugar rush? Since the millennium, the commodity market has embarked on a “super-cycle” bull market. This has been marked by individual commodities taking out the historic highs and high levels of volatility.  This behavioural pattern appears to be well-established and it is a logical premise that such price action will be repeated across the sector. Indeed, such activity is happening all the time with spikes recently seen in lesser-followed commodities such as mercury and peanuts.  

We watch for upside acceleration in commodities that have yet to move. Sugar is a case in point – a firm base and subsequent uptrend, but well below the peaks of 70's and the 80's.  We will be following this, and other agricultural contracts in the Investors Intelligence Commodities Hotline.  


ex Africa semper aliquid novi, according to Pliny the Elder, and this maxim remains broadly true in the modern era. In our picks for the new decade, published in January 2010, we featured Africa as an area of potential. Our view at the time was:

Bull markets have a nasty habit of emerging from where you least expect them. On this basis alone, it may be worth considering Africa . The continent rarely features on the radar of investors, but consider that this region is showing the fastest growth of mobile phone generation in the world. What is more, many African countries are blessed with natural resources, placing the continent on a good footing for the coming century. It's a wild card, but the potential for growth is enormous.”

The region continues to be worth monitoring. The chart (right), shows the JSE Africa Industrial index. To a certain extent, the growth in this local-currency index is an artifact of the weakness of the South African Rand, but clearly there is potential. US investors should keep an eye on the iShares MSCI South Africa Index Fund (EZA), and we will be following this ETF within our reports.

And finally, 2012 will be a year of opportunity in the financial markets. Expect more volatility and sector shifts in equities, major changes in foreign exchange levels and a roller-coster ride in commodities, if you have yet to try a subscription to Investors Intelligence in any of these fields, why not give us a try? One-month trial subscriptions are available online at www.investorsintelligence.com. Alternatively, call the team in New York  (914) 632 0422 or London  +44 20 7352 5435.

Best wishes for 2012 

Mark Glowrey, www.investorsintelligence.com   

 

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US Sentiment holds the key
The Advisors Sentiment Survey continues to provide advance warning of major market turning points.  
The analysis and data regularly feature in the international financial press as a key indicator of market reversion.
Examples of these articles can be found on Barrons, NY Times, and Investor's Business Daily.
Read what CNBC said about the biggest switch in sentiment for 7 years.
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Historic Advisors’ Sentiment data since 1963 is also available; please contact us for further details.

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