Necessary Pep Talk; Aside on Skyrocketing Home Builders

All that glittered before darkness hit last August is shining again in the new year.  Technology stocks up 6%, emerging markets up over 8%, even gold up over 6%.  All the hot stuff from the rally off the 2009 bear market bottom is sizzling and that gives off a warm and fuzzy feeling like the sun is out and flowers are in bloom.  Don’t get sell-trigger happy.  The volatility of 2011 makes you want to sell this rally and that would be a mistake.  As we move higher, any material pullback that could make 2012’s chart look like a V or W on renewed European default or earnings concerns is a buying opportunity.  Reread our 2012 outlook below for more ammo on staying invested.

I wish our small gold short position would drop some more, but we remain confident this will break our way as 2012 develops and the dollar gains traction along with the broad US stock market.  Foreign developed markets are lagging US stocks which is a positive for our US-centric portfolio at the moment.  Our small emerging markets position added a little juice to year-to-date performance, which is a nice bonus. 

Despite so much negative punditry on the topic, Eurozone stocks are positive for the year so far and climbing a wall of worry as tall as the empire state building.  I am not a buyer yet to be clear, but it’s a good sign for the global stock market looking forward.  If you have a lot of time on your hands to watch CNBC or read WSJ, you probably see home builders rocketing higher with no remorse.  Wow, what a move!  Toll Brothers (NYSE: TOL) up 15%, Lennar (NYSE: LEN) up 17% and Pulte Homes (NYSE: PHM) up almost 26%.  That doesn’t even cover the fact that most of these stocks were up over 50% from October through the end of 2011.  Our instinct as humans is to jump on this bandwagon.  Some of you want to dive head first with all your money.  Dip your toe to the tune of 3-5% of your portfolio if you can’t help yourself, but know that the reversal may be very fast and very violent… you will feel immense pain that will make you forget the ride to the top. 

D.R. Horton, Inc. (NYSE: DRI) is the largest home builder in the US with a market capitalization of over $4 billion.  It has a trailing P/E ratio of 62.  The hedge funds that got in early on this rally have now shared some profits with news reporters and TV talking heads who carried the torch to you, the individual investor.  Who will get stuck holding the bag after buying high and selling low?  I am going to guess it’s not SAC Capital, but rather average Joe investor.  Act accordingly.  Accredited, seasoned investors with a strong risk appetite can start looking at long-term puts on some of the biggest gainers.