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DOW 9000 - what's next ?

As I predicted about DOW reaching 9000 by summer end back in Apr, it did cross that milestone right in the middle of summer. So now what to expect ?

It's kind of tricky situation - on one side, DOW had its best 2-week run since 2000. But then we know what followed. On other side, it is still 30% plus down from its high of 14000 in Oct 2007. Here are some of the macro-trends I am watching:
  • Emerging stock markets have started getting into bubble territory with many of them up by 70-100%. Is economic recovery justify this or is this China govt fueled bubble ?
  • Natural Gas prices are still 60% below their peaks so industrial demand has not really picked up significantly
  • Companies are beating analyst forecasts by cutting costs and not by increasing revenues - this cannot sustain unless revenues pick up
  • Consumers have started opening their wallets but that may be cyclical effect of rising stock market wealth. If stock market tanks again, consumer demand would vanish once more
  • Summer is ending and Sept - worst month in terms of stock market returns and Oct - month of major crashes are approaching.
So what should investor do ?
  • If you are heavily invested in stocks, I would recommend selling "out of money covered call" options for Aug or Sept. This way you can generate 2-5% return (not bad for few weeks). If stock does go above strike price (which would be about 10-20% above current market price), your stock would be called and you would get additional gains in your stock. If stock stays below strike price, you keep the premium you got and stock won't be called. Either way, you would either make money in call premium or additional gains
  • If you are still in cash, I would recommend looking into energy MLPs (PWE, XTEX, HTE) or REITs (URE, DDR, CBL).  Another interesting sector to watch out for next week would be insurance companies (HIG, LNC and GWN). These stocks got killed when markets went down. Now due to 2nd querter stock market gains, some of those losses on their bookd would be reversed and BV would increase. I would recommend LNC (Lincoln National) at $16-18 with potential of going to 30 in 12 months. These companies are either paying dividends or would pay soon and hence would reduce the losses in case stocks go down in Sept/Oct. However be careful - DOW is at its highest for the year and could pull down to 8500.
Am I ready to make year end prediction for DOW ? I think DOW would come very near 10000 or even cross it but let me provide my analysis in Aug after studying some more macro trends

Have a good weekend !

/Shyam

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