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Holding Out for Dow 21,000 – and Beyond

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We can’t blame pundits for trumpeting the approaching 20,000 level on the Dow Jones Industrial Average. After all, such huge round numbers are rarities in the stock market, and readers eat up those headlines. Still, I prefer to look at the charts, make my projections, and then live or die by my work.

Right now, Dow 21,000 looks to be the far more important target.

While there is an argument that round numbers act as support and resistance on the charts, I wouldn’t bet the house on them. Few traders make decisions this way because they know that if everyone looks at a big price level, it’s not going to be that effective.

Why? Because people will jump the gun and trade ahead of them, hoping to get an edge on everyone else. That is why the end-of-year Santa Claus rally now starts in November, the current Trump rally notwithstanding.

Here’s how I get to the 21,000 level, and it starts with a measure of the giant trading range that ended in July (see Chart 1).

4 Chinese Stocks Taking on the World

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Beijing’s policy of encouraging Chinese companies to go global is gathering momentum as the Middle Kingdom’s slowing economy prods many to seek out foreign markets in pursuit of growth.

ChemChina’s blockbuster $43 billion acquisition of Swiss agricultural chemicals giantSyngenta is the flag-bearer of the growing global ambitions of Chinese companies keen to expand their markets, acquire cutting edge technologies and burnish their bona fides as players on a global stage. Going global makes sense: China’s economy is expanding at half the pace it enjoyed during the halcyon days of double digit growth, the currency is weakening and the world’s most populous nation is getting older.

Investors should follow that cue and keep a close eye on those companies taking the bold leap beyond China’s shores to take on some of West’s biggest companies that have long dominated many industries. Alan Wang, investment director at Hong Kong-based fund manager Value Partners, is one stock picker watching those stocks looking globally for growth. “Investors are worried about China’s slowdown. If you buy a company with a pure China demand focus, they won’t do well if the Chinese economy continues to deteriorate.” Wang sees opportunities in sectors like high-end manufacturing, or Chinese firms that have big, “tier one” customers like Ford, Apple andNike.

Barron’s Asia has run the rule over Chinese companies eyeing fame and fortune away from their home turf. We’ve identified four stocks that look attractive based on earnings prospects, yield and valuations.

Stocks and Tech Rebound: Bulls Are Still Winning

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The sharp rebound Wednesday after Tuesday’s market drubbing tells us that the bulls are still alive and kicking. Even better, the technology dominated Nasdaq bounced off a key trendline as investors shook off a host of bad news. That’s bullish.

The list of market negatives was rather long although the media seemed to blame the Senate for delaying the vote on the Obamacare replacement bill. But that was only the tip of the iceberg as pressure really began overnight in Europe. The European Commission imposed a record $2.7 billion fine on the tech giant Alphabet (ticker: GOOGL), saying the company skewed search results to benefit its own shopping service at the expense of its rivals. The stock fell 2.5% to lead the tech sector and the Nasdaq lower.

Comments from Federal Reserve Chair Janet Yellen, saying that there will not be another financial crisis “in our lifetime” got traders to scratch their heads and hark back to former Fed chief Alan Greenspan’s “irrational exuberance” comments in 1996. Greenspan’s bearish sentiment was followed by another five years of strong gains.

But there was more. Oil prices rose to break a small technical formation to the upside. The U.S. dollar suffered its largest single-day loss since January. And the VIX — the so-called fear index — spiked, suggesting fear was returning.

None of that made any lasting technical impressions. And when we dig down a bit to market breadth, the losers on the New York Stock Exchange beat winners that day by a relatively tame 892 issues (source: eSignal). That was turned around by a factor of two during Wednesday’s early rebound.

Further, the advance-decline line, which plots the net number of winners minus losers over time, stood at a 52-week high Monday. It is very hard to think the market is weak with this statistic.

I think there are three charting items that now hold the key to the market’s fate for the next few weeks or months. The first is from the bearish side, and it is the Nasdaq’s trendline drawn from the November 2016 low (see Chart 1).

That line was challenged earlier this month when most of the big tech leaders were smacked down. Analysts crawled out from under rocks to proclaim that the game was over for the group and FANG stocks. The group came roaring back.

To be sure, there was some damage done as a few of these leaders, such as Apple (AAPL) and Netflix (NFLX) dipped below their 50-day averages. But many others did not and started to rally back.

This week, there were bearish reversals, or intraday price changes for the worse, again across the group. The Nasdaq once again dipped down to test its trendline. So far, the bulls stood tough. But there is no doubt that their inability as a group to return to new high territory is a warning. Facebook (FB) actually did set an all-time high on Monday, but it closed the day with a net loss. That is not good.

However, as long as the Nasdaq’s trendline remains intact the bulls will reign.

On the bullish side, there are two breakouts I’d like to see happen. The first is in the small stock Russell 2000 index, which continues to trade sideways within a six-month range (see Chart 2). I wrote about it earlier this month and a few days after that column was published the index made an attempt to break out higher. It did not quite happen. However, it is now poised to give it another go.

The second bullish event I’d like to see is a breakout in the Dow Jones Transportation Average. As with the Russell, it continues to trade in a six-month range (see Chart 3). A move higher through its upper border will cause casual Dow Theory enthusiasts to proclaim a new buy signal as the transports join the Dow industrials in new high ground.

Dow Theory is more complex than just the positioning of the two main averages, but supposedly when the companies that make the goods and the companies that move the goods all do well, the economy and the market are in a very good place.

In my view, an important buy signal fired shortly after the election and is still in effect today. However, a nice reinforcing signal could not hurt.

The only real potential problem on the horizon is the tech sector as it manifests in the Nasdaq. The bearish reversals there were real, and a few of the leaders are now trading below their 50-day averages. On balance, though, there is still more to like about the market than not like.

Where Will Stocks Be Four Years From Now?

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In four years—November 2020—the stock market is likely to be no higher than it is today.

No, this is not another forecast based on the presidential election-year cycle.

Instead, it comes from a market-timing model that is one of the select few of the many hundreds I have monitored over the past four decades that has actually beaten the stock market. It does this by increasing and decreasing market exposure at optimal times. Most market-timing models, by contrast, are no better than a coin flip.

This market-timing system is based on a single number that appears each week in the Value Line Investment Survey, a newsletter published by Value Line, an investment research firm based in New York. Its analysts closely monitor some 1,700 stocks, and the number—known as VLMAP, for Value Line’s Median Appreciation Potential—represents the median of the estimates made by those analysts of how much those stocks will gain over the next three to five years.

Market timers use the VLMAP to project where the stock market will be in four years, the midpoint of the analysts’ three-to-five-year horizon.

Could Apple Buy Time Warner? Would It? Should It?

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AT&T has already offered $85 billion for Time Warner, but that deal is far from final, and some folks thinkApple should jump in and steal the prize.

Bankers at Goldman Sachs are pushing Apple to make its own bid, according to a report in the New York Post over the weekend. Apple has plenty of cash to make the deal. Or it could probably choose to raise the money, instead.

It’s not unheard of for big deals to get broken up by a better, more attractive offer. Apple would just have to offer Time Warner a lot more money than AT&T already has.

The bigger question is why would Apple make the move? The company has never made big acquisitions before. Its largest ever deal was a $3 billion purchase of Beats Electronics, the headphone maker and streaming music firm, in 2014.

Stocks Offering Investors Trump-Like Tax Shields

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This year’s presidential race will set records for crotch talk, crime accusations and apocalyptic warnings — records that hopefully won’t soon be broken. It also briefly put a spotlight on tax loss carryforwards, with reports that Donald Trump declared a loss of more than $900 million in 1995, and speculation that he used it to avoid personal taxes for many years afterward.

Stock investors can benefit from carryforwards, too, and not just the kind that involve offsetting portfolio winners with losers. Consider two pending deals on Wall Street. One will pair a movie studio and its accumulated losses with a cash-generating pay-television business. In the other, a telecom with plenty of cash flow and a massive dividend, but little growth, is buying another telecom whose gigantic tax losses will make those dividend payments more affordable.

Why 2017 Could Be Alibaba’s Breakout Year

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Alibaba Group Holding could be a standout stock in 2017, a year most banks expect the broad stock market will post only incremental gains.

Analysts are starting to conclude that the Chinese technology giant may surge in the coming year. Just recently, Morgan Stanley told clients that the $92 stock (ticker: BABA) has about 40% upside. This will strike some investors as an example of Wall Street tailoring a narrative to sell stock to investors who are worried that President-elect Donald Trump’s expected protectionist policies could hamper China’s market, but that view is too cynical.

While Trump’s policies are a risk, Alibaba is far more than a Chinese version of eBay(EBAY) that sells stuff online. The company stands to dominate China’s e-commerce market, cloud computing, and perhaps even financial-services markets.

“We believe that Alibaba is in the early stages of unlocking the value from what we view as its most valuable asset – a rich database that continues to accumulate from its well-controlled and extensive closed-loop ecosystem, through advancements in data technology,” Morgan Stanley’s Grace Chen and her team said in a Dec. 7 report.

According to the bank, Alibaba is worth $130, a price target that reflects $114.90 for its e-commerce business, $7.80 to its strategic investments, and $7.70 for its Ant Financial unit.

Intrigued investors can consider two trading strategies.

With the stock around $92, investors can simply sell put options to position to buy the stock on a pullback. The February $85 put could recently be sold for $1.82. If the stock keeps advancing – shares are up about 15% this year – investors can keep the put premium. Should shares trade below the strike price at expiration, investors should buy the stock rather than cover the put because the stock has a bright future.

New Tracking Stock Offers Cheap Play on VMware

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The newly created tracking stock for VMware that will be issued by Dell as part of its $58 billion deal to buy EMC looks like a cheap way for investors to play VMware.

Shares of the tracking stock, Dell Technologies Class V (ticker: DVMTV), have been trading in the when-issued market for about two weeks and now changes hands at $44.68, roughly a 39% discount to VMware’s (VMW) common shares, now fetching $73.33. VMware is a software company best known for its virtualization products.

The VMware tracked shares are being issued to EMC (EMC) holders as part of Dell’s cash-and-stock acquisition of EMC. Dell announced yesterday that the deal received Chinese regulatory approval, the last hurdle to the transaction, and will close on Wed. Sept. 7. The ticker on the tracker will change to DVMT after the deal closes.

Don’t Cry for EBay’s $1.37 Billion Argentine Stock Sale

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No one can accuse eBay of holding on to things out of nostalgia.

Two days after shares of MercadoLibre (ticker: MELI), an Argentine online marketplace, traded to an all-time high, eBay (EBAY) announced it would sell most of its stake.

MercadoLibre subsequently announced that eBay would sell 7.1 million MercadoLibre shares to the public at $168 each, for a total of $1.19 billion. The underwriters also have an option to purchase up to 1,026,062 additional MercadoLibre shares from eBay. If that option is fully exercised, it would mean that eBay has sold all its holdings (for a total of $1.37 billion), down from an 18.4% stake before the sale.

If Trump Wins: Expect a Swift Selloff in U.S. Stocks

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Moments after the surprise news broke on Oct. 28 that the Federal Bureau of Investigation was renewing its investigation into Hillary Clinton’s use of a private email server, the Democratic presidential candidate’s seemingly solid five-point lead in the polls started to erode, opponent Donald Trump’s star began to rise, and stocks began to slide.

The Standard & Poor’s 500 index fell a full percentage point in the hour following reports of FBI Director James Comey’s controversial letter to Congress—and stocks have continued to slip. The Dow Jones Industrial Average, which closed at 18169.68 on Oct. 27, has given up 1.55% since then, to finish last week at 17888.28.

(See related story: “Millennial Companies Favor Clinton Over Trump 50 to 1.”

The CBOE Volatility Index, or VIX, Wall Street’s fear gauge, shot up more than 20% within hours of the announcement, to 17.2, and now stands at 22.5. And the cost of insuring an investment portfolio with 5% out-of-the money one-month put options on the S&P 500 index has risen 75% in the past week, according to Goldman Sachs.

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Stocks Offering Investors Trump-Like Tax Shields

This year’s presidential race will set records for crotch talk, crime accusations and apocalyptic warnings -- records that hopefully won’t soon be broken. It...
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