Tags: stock | s&P 500

Conventional Wisdom: Long on Convention, Short on Wisdom

Friday, 23 Mar 2012 08:09 AM

By Bill Spetrino

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A couple of weeks ago I told you only two kinds of people can predict the short-term moves in the markets: liars and fools.

In this supposed “lost decade,” when the Dow Jones Industrial Average is about the same as it was 11 years ago, my personal stock portfolio has compounded at almost 19 percent annually. Recently, we were recognized in the Hulbert Financial Digest for our almost 20 percent annual return in our conservative portfolio.

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How could that be when most stocks in that span are either lower or even?

The answer is simple: I don’t own every stock. But, by combining the power of compound interest and reinvested dividends on quality companies at excellent entry points, one gets a powerful “dividend machine.”

After studying Warren Buffett, Charlie Munger, John Paulson, Phil Fisher and Ben Graham, I decided on about a dozen filters and formulas that help me enter low-risk, high-reward common stocks near or around their 52-week lows.

As the S&P has gone up this year from 1250 to almost 1400, I have continued to have a large majority of people tell me that this rally is low-volume and phony and we would soon have a drastic pullback to the October 2011 levels.

Thursday was the third straight losing day for the S&P, and the doom and gloom crowd now finally feels their "correction" is coming.

I am not a market timer, but my instincts tell me the "pullback" to 1280 is not coming in the next few weeks.

Why?

First of all, the S&P has spent 31 straight trading days above 1350 interday; you have to stay below 1350 before you get to 1290.
Second of all, the XLF (the ETF that tracks financial stocks) recently has more call buying than put buying. That is rare given that most people in an ETF are hedging, and this has been a bullish sign in the past.

Now, most of the hedge fund managers starting next week will have to buy equities, especially ones that have increased in the past quarter to "chase performance."

Simply put, any hedge fund that is heavily shorting stocks or is in cash is going to look foolish at month- and quarter-end.
If history is any guide, these hedge fund managers will be buying these high-flying stocks like Apple and almost every financial stock that has risen in 2012. These managers are trying to look intelligent when the quarterly statements come out of what they have in their portfolios.

Plus, recently heading into earnings season, the number of positive revisions is exceeding the number of negative revisions.
A slight pullback is likely sometime in 2012. But according to my indicators, the bull market that is starting its 4th year should continue, at least for the next few weeks.

Like I said, I am not a market timer, but after listening to an ignorant media and pseudo market timers miss a huge run in the S&P, I feel compelled to give you my insights.

About the Author: Bill Spetrino

Bill Spetrino is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of the Dividend Machine. Discover more by Clicking Here Now.


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