- - Thursday, February 9, 2012

ANALYSIS/OPINION:

In 1929, the Coca-Cola Co. used the slogan “The pause that refreshes” to advertise its flagship beverage. The idea was that drinking Coke would restore and provide fresh vigor. I bring that slogan up as it appears the overall stock market, which has had one of its best starts in more than 20 years, is heading for a pause, if not a pullback.

Thus far in 2012, the S&P 500 is up more than 7 percent, while the Nasdaq is up just shy of 12 percent and the Dow Jones industrial average is up less than half that.

The year-to-date moves in those indices have pushed the stock market back to levels from July 2011, which preceded the August fall-off. As a reminder, the market tested levels at or near that July 2011 high two other times last year, both of which turned out to be short-term peaks in the stock market. As one can imagine, the return to that level for a fourth time has many wondering if the 2011 pattern of test and fail will repeat or if there is sufficient strength to push through to a new high.

While I have and continue to use a fundamental perspective when looking at industries, companies and their respective stocks, every now and again it pays to widen that perspective and look from a technical perspective. Technical analysis is used by many investors, and it evaluates a security by analyzing statistics generated by market activity, such as past prices, volume and a number of other indicators.

Unlike fundamental analysis, which examines the drivers and competitive factors of an industry and companies to determine if the shares are undervalued, priced accordingly or overvalued, technical analysis uses charts and other tools to identify patterns that can suggest future activity.

As I have written here the last few weeks, we have received several indications that the domestic manufacturing economy has improved. Even while some have tried to paint the January employment report last week as favorable - which boggles my mind considering the 1.2 million people who left the workforce during the month - the expectations are for the sluggish recovery to continue. Even the Federal Reserve’s forecast calls for the U.S. economy to grow 2.2 percent to 2.7 percent, which is below the 2011 final quarter’s growth rate. Reading between the lines, while we will grow faster than we did at the start of last year, 2012 in full will resemble 2011 in terms of overall economic growth.

Slow growth is better than no growth or another contraction, but there are a number of industrial companies whose stock prices are overbought on a technical basis and likely pricing in the hope for a stronger recovery than might occur. Those companies include Cummins Inc., Caterpillar Inc., E.I. du Pont de Nemours and Co. and Dover Corp., each of which has moved solidly higher over the last several trading sessions. Casting a wider net, the same can be said for the shares of Parker-Hannfin Corp., Ingersoll Rand PLC, Fastenal Co. and Pall Corp. Industrials are not the only types of companies falling into that overbought category; there are a number of retail and technology companies as well, including Coach Inc., J.C. Penney Co., Apple Inc. and Netflix Inc.

If I am right and the market retraces some of its gains, investors should treat it as a pause to refresh their holdings. By that, I mean that investors should revisit those companies whose fundamentals remain strong and capitalize on any pullback to get in at better levels.

Next week, we’ll be back to a more rapid pace of economic data, including the latest on retail sales, the manufacturing economy and inflation. Stay tuned.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington area. He can be reached at cversace@washingtontimes.com. Follow him on Twitter @ChrisJVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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