Gene Peroni, Senior Vice President, Equity
Research, Advisors Asset Management
Gene Peroni: My background is in the
area of technical analysis. Over the years we determined that our technical
analysis approach was useful not just for short-term traders but for those
looking to identify those stocks that could be bought and held over a longer period
of time. In 1995 I made the transition from research to portfolio management,
initially with unit investment trusts, which are static portfolios that are
chosen for a specified length of time. So my comments should be seen as
technically-driven, based on what we are observing in terms of trends in the
market.
Our bottom-up approach includes price
architecture, net money flow behavior — mostly on the part of the
non-institutional or non-reactive participants — and, finally, relative
strength. We begin by identifying attractive individual stocks and then
noting the concentrations of attractive stocks. That leads us to what sectors
look most promising.
If, as we update and study our charts on an
ongoing basis, we see, for instance, that Boeing looks attractive and
Northrup and Lockheed Martin also look attractive, we might make a
case that aerospace and defense should be part of our overall
strategically-diversified portfolio. We will also include other sectors where
there are the greatest depths of attractive individual stocks.
Wally Forbes: That sounds very
interesting. It goes above and beyond the more standard kinds of analysis.
Peroni: It does. Our portfolios
generally have a low correlation to portfolios that are quantitatively or
fundamentally derived. Also, our portfolios are unbiased; we do not depend on
company management for information. We’re not coming to market with any pre-notions
that because oil is at $82 or interest rates are near 0.0%, sectors should
perform in a certain way. We do not rely on past history exclusively in forming
a market outlook – we look at individual stocks on an ongoing basis and look
for subtle changes in the stock’s historical behavior to glean whether there
are meaningful shifts in the market or whether they are simply reinforcing
ongoing trends.
Forbes: Terrific. Looking forward to
hearing your thoughts.
Peroni: There’s much consternation that
this will be another year to sell in May and go away. There is certainly a lot
of evidence in the daily headline news, particularly concerning Europe,China
andIndia, that would seem to indicate that the conventional wisdom will be
right. We consider, however, that the market is highly oversold at this
juncture. In fact, a recent Merrill
Lynch report cited that sentiment was actually at its most negative
levels since 1997.
Considering the gravity of that comment, and
given that it does mesh well with what we are seeing technically, in terms of
very oversold price behavior, good accumulation trends on a non-institutional
basis and good continuity of leadership – that is, the leadership that was
evident from the start of this cycle in 2002 was also prominent in the recovery
following the 2007/2008 bear market and much the same leadership that we see in
the market now.
We would make the case here that continuity
of leadership is important, and that the 2007/2008 bear market was not a
conventional bear market because it didn’t cause a sea change in leadership or
usher in an entirely new economic cycle as bear markets have done historically.
Sentiment is so negative and we are
repeatedly reacting to recycling worries about Europe. Any kind of good news
this year – whether it be fiscal, monetary or political – could spur a very
considerable rally.
The Dow did break below its 200-day moving
average for the first time in six months, but it quickly recovered from that
area and bounced back up to the 12,600 area. I think the recent weakness might
have addressed some of the near-term selling and the reaction to the latest
headline news with respect to Spain, Italy and Greece.
We are optimistic that with so much fear in
the market and with the market having already corrected about 10%, that the
risk to reward opportunities are improving. The market is tightly wound
like a spring and could react very significantly to good news. I think we
are going to first see this play out in terms of sector improvements, and then
I think the broader market will follow along.
Forbes: That is encouraging. Against
that background, do you have some particular investments that you’re suggesting
at this point?
Peroni: We do. We continue to like the
agriculture story. We think it is an enduring longer-term story with a number
of the components in that area showing attractive relative strength. We
like companies like CF Industries (NYSE:CF), Agrium (NYSE:AGU) and Monsanto (NYSE:MON).
We also like the technology story. As you
would expect with this level of general market volatility, technology moves to
extremes. I believe the sector is approaching oversold extreme levels. So
companies like Alliance Data Systems (NYSE:ADS) and IBM (NYSE:IBM) look
attractive, as does Apple (NASDAQ:AAPL). Apple has corrected considerably
and has recently tested support.
Another area that we like is consumer
discretionary. In that regard, we particularly like some of these sports-line
companies, such as Under Armour (NYSE:UA) and Nike (NYSE:NKE).
Forbes: Sounds like a fairly broadly
group of stocks.
Peroni: Well it is a pretty broad-based
advance – this is not a micro-thematic advance. That is probably because of the
great levels of liquidity due to the Fed’s accommodating policy. The Fed’s
transparency takes a lot of monetary uncertainty out of the mix.
I’ll just mention one other area, and that is
health care. Our father’s idea of health care was skewed towards defensive
growth. Today it is much different – it is much more growth focused. There is a
good sampling of stocks from the big-cap pharmas like Pfizer (NYSE: PFE), for
instance, to Edwards Life Sciences (NYSE:EW), Laboratory Corp
ofAmerica(NYSE:LH) and some of the generics, like West Pharmaceutical (NYSE:WST).
Forbes: Considering all of the dire
things that have been in the news, it seems like some hopeful opportunities.
Peroni: Well with the dire headlines,
one would think that the market should be hundreds of points, if not thousands
of points, below where it is today. But I think the underlying support for the
market is the direction of interest rates and company earnings as they compare
to Wall Street expectations. We have extremely low interest rates right now
along with the transparency of the Fed’s assurance that rates are not likely to
rise any time soon. And, earnings are doing quite well relative to Street
expectations. These two factors are providing underlying support for the
market. I think there is a valuation watermark here for the market very close
to the 12,000 level.
Forbes: Sounds very encouraging indeed
for those who are reading this to have some courage about the long term rather
than looking just at the immediate future. I appreciate it.
Peroni: I appreciate the opportunity.
Thank you, Wally.
Original Article Here
No comments:
Post a Comment