The Stock That Says a Thousand Words

What a difference a couple of months make!

If we think back to early August of this year, we can remember several days in which the Dow Jones Industrial Average fell 400 to 500 points in a single day. As the stock market continued to deteriorate, stock advisors started throwing in the proverbial towel and turned big-time bearish.

At the beginning of October the Dow Jones Industrial Average hit a low of 10,404, a level not seen since September 2010. The stock market’s poor performance in the period from August to late September created the highest amount of stock advisor bears since March of 2009 (The Strongest Indication Yet That Stocks Are Short-term Oversold).

And, as usual, at the depth of pessimism, the Dow Jones Industrial Average turned up. Stocks moved higher; we are now in striking distance of Dow Jones 12,000. Hopefully, my readers followed the guidance here in Profit Confidential…we’ve been writing for weeks that the bear market rally that started in March of 2009 had yet to finish its business (Four Reasons Why Stock Prices Will Bounce Higher Now).

The action of the Dow Jones Industrial Average and the action of benchmark stocks (see “Michael’s Personal Notes” below) are often referred to as leading economic indicators. And this brings me to the “granddaddy” leading benchmark stock, Wal-Mart Stores, Inc. (NYSE/WMT), a component of the Dow Jones Industrial Average.

If we look at Wal-Mart’s stock today, we see that the stock is pennies away from breaking to a new price high for 2011. Wal-Mart’s benchmark stock is telling us that low-end retail sales are good in America. Why wouldn’t they be? With the unemployment so high, the middle-market retail stores are suffering as consumers cut their spending and shop the lower-end retail stores like Wal-Mart and Target Corporation (NYSE/TGT).

But if we look closer, we will see just how accurately Wal-Mart’s benchmark stock is predicting the future. The benchmark stock is telling us that sales at low-end retail are brisker than any other time this year; but if we look at the long-term price chart of Wal-Mart’s stock, we see the stock is far from hitting its all-time high reached back in early 2002.

For technical analysis junkies, Wal-Mart stock hit a high just under $65.00 a share in the first quarter of 2002, the peak in a classic head-and-shoulder pattern. In the fourth quarter of 2008, Wal-Mart’s stock made a run at its price high, but failed. The first shoulder was formed. Now, the stock’s making a second run at its price-high, which I believe will fail, and the second shoulder of the pattern will be carved out.

The action of Wal-Mart’s stock falls in squarely with the economy and my bear market prediction. The Dow Jones Industrial Average has been in a bear market since March of 2009. We won’t break to new stock market highs with this rally, but we will get high enough to lure more investors back into the stock market, which is exactly what the bear wants.

Michael’s Personal Notes:

Maybe the economy isn’t in that bad a shape after all…

Visa Inc. (NYSE/V), the world’s biggest consumer payment network, reported last night that its third-quarter profit beat analyst expectations. Visa reported a profit of $880 million for the three months ended September 30, 2011. Business is so good that Visa is buying back its own stock in addition to boosting its quarterly dividend by a whopping 47%.

Visa can be looked at as a benchmark stock that gauges economic growth. Benchmark stocks are the stocks of companies that are dependent on the sale of goods or services to either consumers or business. Common sense dictates that, when the world’s biggest credit-card company is seeing profits rise, it’s a good indication of economic growth, not contraction.

The more products or services consumers buy, the more profit for benchmark stock Visa—a good indication of economic growth.

I have written several times that stock advisors, equity analysts, and economists turned too bearish on the economy too fast when the stock market started to plunge this past August. They overreacted.

Yes, I’m personally bearish on the long-term outlook for the economy for the many reasons that I often write about on these pages. I believe the government and Federal Reserve are limited in their next moves should the economy start to contract again. But the economy isn’t collapsing today. The economy will slow over the next few months. Higher profits at benchmark stock Visa are proof that the economic growth isn’t coming to a halt…just quite yet.

Where the Market Stands; Where it’s Headed:

A few points here, a couple of points there, and all of a sudden the Dow Jones Industrial Average is up three percent for the year. Add a dividend yield of 2.5% and, presto, stocks have retuned about 5.5% in 2011—multiples of returns that investors are getting on 90-day U.S. T-bills.

But it’s not over yet. As I have been writing, the bear market rally will continue to move higher against the backdrop of extreme pessimism amongst investors and stock advisors and better-than-expected third-quarter corporate earnings.

The Dow Jones Industrial Average has inched up only 130 points away from 12,000 level—an important psychological point I believe the bear market rally will soon pass through.

What He Said:

“For the economy, the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ‘drunkards’ during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008