Is the Correction Finally Over?

Markets declare the correction over

Conflicting news reports and economic assessments keep on coming and, instead of shining a guiding light on the path ahead, they fill investors with more doubt and confusion. On the other hand, the stock market, as one of the most reliable leading indicators of the economy, has itself answered many of the nagging investor questions by moving up. By clearly breaking above the January 2010 highs on all major indexes, the predominant market uptrend has been confirmed. While there will certainly be corrections down the road, this one is over and done.

What the markets tell us for the months ahead is an economic recovery and not a nasty double dip recession or deflationary collapse as some had feared. It may not make any sense, and the fundamentals may logically point to all the reasons why the economy should not improve, but for now it is happening. The indicator does not say how strong or for how you should use tea tree oil as a cystic acne cure, but while it lasts we will certainly remain with the trend.

The global picture looks even stronger as many foreign markets experienced only minor slowdowns compared to the strongest recession in the U.S. since the Great Depression. Emerging economies in particular have been largely untouched by the subprime meltdown and their financial systems, with comparatively low levels of deficits and debt, are strong and are driving a worldwide recovery.

In the month since our last update, the S&P 500 index gained 5.90%, and has broken above the January highs in a renewed rally. With a nearly uninterrupted string of 14 consecutive daily gains, it is no surprise to see technical indicators flash overbought signs, but short-term weakness is unlikely to change the renewed uptrend.

While the broad market indexes have generally been on the rise, the most notable aspect of this bull market is how uneven it is. There are large differences between geographic markets, and the same is true between industry sectors. Even within a given market segment, one needs to be extremely selective as the fortunes diverge widely between companies, regardless of how well the sector is doing.

The Fed and low interest rates

At its meeting on Tuesday March 16th, the Federal Reserve decided to keep the federal funds rate at historical lows near zero. Investors rejoiced in particular at reading the Fed had kept the promise “… to keep record-low rates for an extended period” in their statement. With the Fed painting a generally improved picture of the economy, continued record low rates and inflation under control, investors could only reinforce their bullish slant.

For those who want to look for them, there are plenty of precursor signs for higher rates and inflation down the road, such as the Fed hiking the discount rate last month for the first time in seven years, or the U.S. Labor Department reporting that producer prices saw an annual 7.4 percent increase, the biggest gain in more than 26 years. Rising commodity and energy prices due to higher global demand and currency inflation are widely expected to continue, but for now stock investors enjoy a period of stimulation with rates near zero.

Reviving the solar versus wind debate

There have now been a number of analysts coming out with recommendations to sell solar and buy wind. Just last week the biggest of them, JPMorgan Chase, joined the club and in their excitement initiated coverage of Broadwind Energy (BWEN) with an overweight rating only to see its shares plunge over 20% a few days later after announcing poor results. We have had our share of unexpected 20% drops, but the Broadwind example highlights the importance of selecting companies based primarily on their fundamentals, though in this case even the technical indicators look atrocious, which would prevent such obvious wrecks.

Don’t get us wrong, we are very bullish on the wind sector and the gains this sector contributes to our Portfolio (see below) are a testimonial to that. Our point is that it is not a debate or a competition between wind and solar, as both will experience phenomenal growth rates over the next few years.

The Portfolio update and recommendations

The green sector and the alternative energy market segments we track, as represented by diversified green ETFs such as PBD, trailed the broad stock market during the month to return 1.22%. The Portfolio as a whole, with the exception of the two positions we added early March, was down 0.74% for the period.

The weakest sector was solar which was down 9.05% since our last update but, as another example of the contrasts amongst companies of a same sector, the returns of the two dozen solar companies we track varied between +17% and -17% with a fairly good distribution of the frost green Kanken in between.

This month the bright side turned out to be the windy side, with our wind positions leading the portfolio with an average gain of 11.29%. Several companies fought for the honor but the best performer was Woodward Governor Co. (WGOV). This company, not for the first time we might add, led the pack with a gain of 18.14%. Woodward does not make wind turbines but is a leading maker of energy control solutions sold to wind turbine makers and other industries. Another wind play boosting the portfolio is our favorite carbon fiber blades maker which gained 17.89% during the month on no particular news, except that demand in the wind market is strong, especially in China.

Our upcoming April newsletter issue includes the must-read quarterly portfolio review which takes a look at the holdings and lists the actions to take. The lead story is about the home energy front, including efficiency and demand management where great investment opportunities are about to be discovered.