Bull Market may be stuck in a Financial Twilight Zone

Fellow Friends and Traders,

Research shows that bull markets have two stages. First we have the perception or policy change. The Fed and/or governments pump tremendous liquidity into the system.  However,most of these monies find their way into the markets and not the economy. Investors then believe the economy will begin to recover.

The second or earnings-driven stage takes hold when earning turn up. This is defined as the first year of profit recovery.

Analyzing 10 bull markets back to 1949 shows that the average gain in stage one is 27% versus 40% this time. Meanwhile, the earnings-driven stage, which has not begun yet, averages almost 95%. Something to look forward to.

Unfortunately, this is at least 3-6 months away and could be further delayed by a double dip or "W" recovery in the economy and not a "V" as so many  have come to expect.

Until a sustainable profit recovery becomes apparent we may be stuck in a "Financial Twilight Zone" and the best that can be expected is a period of consolidation. Given the expectation of a weak second quarter profit outlook a market correction beyond my 875-880 level is a definite possibility.

What's more, 51% of the CEOs of large Fortune 500 companies polled by the Business Round Table expect lower capital expenditures and 49% are anticipating a cut in their payrolls to meet the new "normal" lower sales levels. Any turn in the dismal jobs picture may not surface until well into next year.

Buffet even put his two cents in for what that's worth about the economy and the market completely ignored it. He said the economy is in shambles and will take a long time to recover. He further stated you can get 9 women pregnant but do not expect a baby in 1 month. 

We had a taste of the correction this last two Mondays with the market having two 90% down volume days with heavy selling. This is not a good sign. Trim Tabs believes we could retest the lows of March. I'm certainly not that bearish. Given the expected EOQ markup these last two days of June we should be higher. If there is a lack of follow through July 1 it could be a very dull summer.

I'm also concerned that the VIX hit a new low near 26 and the S&P did not confirm with a new high, divergence pure and simple. We'll let Mr. Market tell us what to do.

HUN follow up:

Andrew Ross Sorkin, a financial writer for the NY Times, writes the Huntsman settlement appears to be a good deal for the chemical company. HUN put up a good case against the banks and had a real probability of winning and even if the banks lost, a good judge might set the jury verdict aside and the banks could easily appeal. WOW! That would be a swift kick in the butt.

I thought I covered every thing but not a weak settlement. It's so hard to find great ideas that move independent of the market today. I pored my soul into this one. To say I'm disappointed is the understatement of the year. However, we must move on.

HUN was an average value and average chemical company that was on the verge of being down-graded by both Moody's & S&P. Now HUN should be upgraded rather nicely.

Today, we have a solid book value of $5.50, excellent down side protection with a 7.5% dividend yield. I'm hoping HUN kicks up the dividend to $0.60. We even have an economic call option upside and finally a longer time sell out. I like this idea. The Huntsman CFO called HUN a steal at this price. We'll see if corp insiders buy more stock here.

I will look to buy HUN under $4.50, sell puts (5.00 strike) then and write higher strike calls on rallies. Right now, I'll let the stock trade and just watch.

I'd like to end my note with a bit of humor. Alan Abelson of Barron's writes of South Carolina Gov. Sanford, "The revelation that Mr.Sanford had strayed from the pristine path seemingly has severely lessened the likelihood of running for the presidency in 2012. That's too bad really, since the job begs for someone with experience in foreign affairs."