It wasn’t a stunning leap. Only 70 points. But Tuesday’s advance took the Dow to a five-month closing high — and triggered a gush of bullish pronouncements. “Everything is hunky-dory,” declared beloved CNBC pitchman Jim Cramer.
Well, maybe everything is. Or maybe it’s just January, when a lot of trigger-happy traders like to pretend they’re starting fresh with a blank sheet of paper. No matter how badly you did last year, this is your chance to buy, buy, buy again!
Monday’s Q4 earnings report from industrial bellwether Alcoa (NYSE:AA) hardly seems like the material to build a raging bull case on. The aluminum maker lost 3 cents per share, its first quarterly deficit since 2009.
To be sure, sales came in a little higher than analysts expected, and CEO Klaus Kleinfeld predicted that production cutbacks would lead to a shortage of aluminum. But what would you expect him to predict?
His stock has dropped in half since last April. Wall Street is clamoring for some kind of light at the end of the tunnel. Given Europe’s hobbled economy, it will be quite a stretch for global aluminum demand to meet Kleinfeld’s forecast of a 7% increase in 2012.
As earnings season wears on, other executives might find it more difficult to put a smiley face on disappointing results. If investors start to look past the spin (as I think they will), the headline stock indices could backtrack sharply in February and March, setting up the year’s first broad-based buying opportunity.
Meanwhile, I’m playing a defensive game. Yesterday, the SPDR S&P MidCap 400 ETF (NYSE:MDY) triggered my sell signal at $165. Accordingly, I’ve made the portfolio adjustments I mentioned in last Friday’s post. My overall asset allocation now stands at 51% stocks, 49% fixed income — the most cautious posture I’ve taken in a long time.
There are very few bargains with the market at today’s levels. However, if you’re underweighted in stocks (versus my conservative allocation), you might nibble at a couple of defensive issues the crowd has left behind in its frenzy to embrace risk.
Two in particular I’m thinking of are water utilities American States Water (NYSE:AWR) and California Water Service (NYSE:CWT). Both of these pint-sized outfits have raised their dividends, year after year, for decades.
What’s more, they’re priced at a significantly lower multiple of year-ahead earnings than some of the industry’s larger players. That’s an invitation for a takeover bid, at perhaps a 15% to 25% premium over yesterday’s share price.
- Buy CWT at $19 or less. Current yield: 3.5%.
- AWR, which yields 3.3% rates a buy at $35 or less.
