Sharp Rally May Sustain a Short-Term Bounce

The sharp rally yesterday helped push the main stock indexes into the plus column for the week. The Dow Jones rose 1.00%, the S&P 500 was up 1.41% and the NASDAQ jumped 3.08%. The MCSI Emerging Markets Index ended the week flat, down a hairsbreadth by 0.09%.

Big gainers in your Alpha Investor Letter portfolio included the PureFunds ISE Cyber Security ETF (HACK), up 5.35%, Apple Inc. (AAPL), gaining 4.72%, and the Market Vectors Biotech ETF (BBH), jumping 4.13%.

Markel Corp. (MKL) continued its relentless run to hit a new 52-week high.

Several of your positions moved above their 50-day moving averages to become a BUY. These include Berkshire Hathaway (BRK-B), Vanguard Russell 2000 Index ETF (VTWO), First Trust US IPO ETF (FPX), Guggenheim S&P 500 Equal Weight ETF (RSP), Market Vectors Biotech ETF (BBH), PureFunds ISE Cyber Security ETF (HACK), Global X Guru ETF (GURU), iShares Currency Hedged MSCI Germany (HEWG) and BYD Company, Ltd. (BYDDF).

Yesterday, the market posted an impressive surge with 29 of the Dow 30 stocks rising, and the final component, Boeing (BA), falling by just a hairsbreadth. This was the first time since early April that at least 29 members of the Dow rose together on the same day. This comes on the heels of what had been depressed market breadth in which fewer than 15 Dow members rose on an average day. After a strong thrust like yesterday’s, a week later the market historically was higher 15 out of 23 times. Two weeks later, there were only three losses greater than 2% but eight winners greater than 2%.

So there is a decent chance that the current rally has some short-term upside.

Still, there are several factors weighing in the market in the months ahead.

The S&P 500 is in an earnings recession, with the index suffering the third quarterly decline in a row and the worst since 2009. In addition, seven out of the 10 major sectors in the S&P 500 are in the red so far this quarter. By way of comparison, a year ago, only two sectors suffered profit drops. It is hard to move up if the earnings just aren’t there.

This explains why the best performers since January have been large-cap dividend players — the Dividend Aristocrats and Dividend Dogs — the subject of Tuesday’s The Global Guru. Today, cash is king and high dividend stocks are the ones cranking out cash on a steady and reliable basis. Growth stocks favored by aggressive strategies are out of favor.

I also discussed these other themes on Monday’s subscriber teleconference, which, in case you missed it, you can listen to it here.

Portfolio Update

Markel Corp. (MKL) gained 2.38% last week. Markel has been a remarkable workhorse in the portfolio — especially as of late. Up more than 50% since its recommendation, this stock holds the #2 top-gainer position in the portfolio — second only to Warren Buffett’s Berkshire. MKL also has been quite resistant to recent market gyrations and has gained nearly every day since its last May 3 earnings report — hitting new 52-week highs nearly every day for the last three weeks. This company enjoys some of the best management in the business, and it shows. MKL is a BUY.

AdvisorShares TrimTabs Float Shrink ETF (TTFS) added 2.20%. TTFS is all about corporate stock buybacks, which are generally a positive thing for a stock’s price. TTFS focuses on companies that are buying back stock using profits and free cash flow, rather than borrowing money to finance stock repurchases. This is an important factor because incurring more debt can nearly cancel out the positive effects of stock buybacks to a company’s balance sheet. TTFS is just pennies below its 50-day moving average (MA) and is a HOLD.

The Walt Disney Company (DIS) basically was flat last week, dipping just 0.43%. Although recent news reports have stoked Netflix’s stock price in the past days, the news is just as important to Disney. Disney and Netflix signed a deal in December 2012 giving Netflix exclusive rights to stream content from Disney (as well as Marvel, Lucasfilm and Pixar). The deal, set to take effect in September, pushes Disney’s content to arguably the largest online audience on the planet. DIS is a HOLD.

Guggenheim S&P Spin-Off ETF (CSD) moved 0.98% higher. Guggenheim issued a statement recently regarding CSD getting a new underlying index and name. CSD is no longer using the Beacon Spin-Off Index as its underlying index. It is now using the S&P Spin-Off Index and is referred to as the Guggenheim S&P Spin-Off ETF. CSD’s old investment approach involved companies that had been spun-off within the past 30 months. CSD now invests in approximately 58 U.S. stocks that have been spun-off more recently. CSD is a BUY.

Market Vectors Biotech ETF (BBH) popped 4.13% over the past five trading days. This biotech exchange-traded fund has been trading sideways for several weeks, moving along just under the 50-day MA. BBH also pushed above this line three weeks ago, only to sink back below. This week’s move appears to have much more momentum behind it, even pushing BBH above the 50-day MA to become a BUY.

iShares Currency Hedged MSCI Germany (HEWG) added 2.63%. HEWG is making some encouraging technical moves as of late. HEWG attempted to move above the 200-day MA one month ago, only to fail after a few days and slip back down to its 50-day MA and find support. Yesterday’s move up above the 50-day MA occurs just as the descending 200-day MA and ascending 50-day MA appear poised to meet in the coming weeks. When they do, the bullish pressure is typically quite significant. HEWG is now a BUY.

Costco Wholesale Corporation (COST) dipped 0.72%. COST will report earnings on May 25 after markets close. Estimates call for earnings per share of $1.22 on revenue of $27.12 billion. COST is a HOLD.

Sincerely,