by Gordon Pape in the Internet Wealth Builder
World markets follow Wall Street's lead, but a correction could be looming.
There's no other way to describe it: November was an amazing month for the stock markets. Despite a war raging in Afghanistan, more anthrax deaths, confirmation that the U.S. is indeed in a recession, worries about more terrorist attacks, the Enron collapse, and bad news on such diverse fronts as consumer confidence, unemployment, and earnings, investors rushed out and bought stocks like almost never before.
All the major U.S. indexes experienced one-month gains that ranked among their best ever. Nasdaq led the way with an big 14.2% advance, followed by the Dow at 8.6% and the S&P 500 at 7.5%. The TSE 300 went along for the ride, with a 7.8% gain. But, significantly, the blue chips did better than the broad index, with the S&P/TSE 60 jumping 8.6% for the month. That's a tip-off as to the selective nature of this market. Big technology stocks like Intel, Cisco, and Microsoft have done well, along with large, stable companies like Home Depot. But volume has been light and the buying has been selective. Safety is still a top concern in people's minds.
World indexes took their cue from Wall Street. Every major exchange around the globe was up, with especially impressive results from Hong Kong (+12%) and Frankfurt (+9.4%).
Now the debate is on as to whether this big rebound signals the birth of a new bull market or is just one more rally in an extended bear.
Our view remains cautious. For many months, and especially since Sept. 11, we have been advising members to put prudence ahead of profits in their scheme of priorities. However, we have never suggested selling everything and retreating to cash, nor would we. Our advice has been, and remains, to make new purchases judiciously and to build a portfolio with which you are comfortable for the long term.
I expect there will be a market correction in the wake of these big gains, perhaps this month as we come up to the tax-loss selling period. Technology stocks in general and Nasdaq leaders in particular look vulnerable to pull-backs. Some have enjoyed huge gains recently. Intel (NAS:INTC), one of our IWB recommendations, has gone from a low of US$18.96 just after the terrorist attacks to a Friday close of US$32.66. That's a gain of 72% in less than three months. I don't suggest selling Intel at this stage as the fundamentals are looking better, but a temporary retreat to below US$30 wouldn't surprise me.
The story is the same at Cisco Systems (NAS:CSCO) which has recovered from a September low of US$11.04 to close on Friday at US$20.44 - a bounce of 85%. Again, this may be too much too soon - the valuation is very high at this level.
There are many similar examples. Already, some analysts are warning of a new high-tech bubble if these trends continue. I doubt the market is foolish enough to let that happen again, which is why I expect a correction.
So don't feel you must plunge into this market or you'll get left behind by a runaway train. That does not mean to sit on your hands. If you have cash in money market funds, your returns may be getting close to zero. You should gradually deploy some of that money as opportunities arise. There should be quite a few in the next month or two.
From the Dec. 3 edition of the Internet Wealth Builder, a weekly e-mail market letter featuring stock selections from some of Canada's leading experts. See the Home Page for a special Holiday Season membership offer.