Profit From the Pros archive
[12/30/11] Reitmeister's 2012 Outlook & Strategy
I expect the US economy to continue to Muddle Through and that is good enough for corporate earnings growth. Right now earnings projections for the S&P 500 next year are around $106 per share. That means the market is only trading at a paltry PE of 12. Well below the historical norms of 14-15.
As people worry less about Europe and China then it will create a tractor beam pull towards stocks. I can easily see the market getting to 1400 on the S&P 500 which equates to a PE of just 13.2.
I think the groups that will do the best in 2012 are the ones that did the worst in 2011. And those are cyclical and growth oriented groups that got pounded down when the recession fears took hold. This also means that the defensive positions that served us well in 2011 will underperform if people become less risk adverse as they are now.
[12/19/11] According to the Stock Traders Almanac, December is traditionally the best month of the year for stocks. That’s because December has been in the plus column 75% of the time over the last 60 years. Plus the days just before and just after Christmas are amongst the most bullish on the year. Don’t take this one to the bank, but it does bode well for this week.
What else bodes well is that Europe is starting to recede from the headlines. With that their bond rates are retreating from scary levels as well. For example, the Spanish 10 year note is now down from 7% to a much more palatable 5.3%.
The less there is to worry about in Europe, the more we can focus on the home front. And there is plenty of the economic data to support sufficient GDP growth to generate corporate earnings growth. And with valuations so attractive on a historical basis, it will create a pull towards US stocks soon enough. So I think Santa will deliver in the days to come.
[12/16/11] The World May Be Falling Apart, But...
But... the US economy continues to improve as was seen by the flurry of economic reports on Thursday including:
• Jobless Claims came in at 366K versus expectations of 390K. This is the best reading since July 2008 and bodes VERY well for job gains in December
• Empire State Mfg. beat expectations +9.53 to 3.0
• Philly Fed Survey doubled the consensus with a +10.3 reading
• Yes, the Industrial Production report was lighter than expected, but Empire State and Philly Fed cover similar topics and have more recent data. So it's easy to brush this one off.
I know many of you will say "Hey Reity, that information is in the past. How about the problems in Europe and China? Because of that Goldman Sachs just lowered their 2012 US GDP forecast down to +1.5%".
And to that I say; AWESOME!
That is better than the GDP growth rate of the first 3 quarters of 2011 which was good enough to create excellent earnings growth and a reason to own stocks. If we do that again in 2012, stocks will be a much better investment than bonds or cash.
That doesn't mean the market will jump right away because I say so. However, the odds are currently in favor of stock ownership for the year ahead. That is why I am using recent dips to add to my long positions.
[12/6/11] As I shared in recent commentary, the market has been trading in a clear range since early August. The downside support is 1100 and the upside resistance is 1265 (where the 200 day moving average sits). Monday we flirted just above that line for a while before settling in a notch below at 1257 (which is where the year started).
The catalyst for these gains is growing expectations of success in the Eurozone. Many are predicting a "Shock and Awe" barrage of new strategies this week coming into the European Summit on Friday to help contain their debt crisis.
I too think the odds are fairly good of them impressing investors this week leading to a breakout to the upside. However, if they stumble, then we will fall 5%+ in no time at all. Place your trades accordingly.
[12/1/11] Wednesday there was a lot of water cooler talk around the Zacks offices trying to decipher what is happening in Europe and what it means for the markets going forward. Truly I could write a "War and Peace" manuscript with the volume of insights that flowed from that conversation.
In a nutshell, 2 people thought that the market blows up from here. 3 thought we go sideways for the next year. And 2 thought we press to new highs. That is a dead heat and certainly explains why the market is so tricky right now.
Here was my key takeaway. The US made a roadmap of how to solve these kinds of problems back in 2008/2009. Europe can follow that successful blueprint, but they need 17 countries to agree to the terms. And that is why it’s taking so long to come together.
Hopefully they gravitate in that direction, which would bode well for the US economy and stock market. If not, then watch out below. [In other words, I don't know.]
[11/18/11] Here is the key section from yesterday’s commentary:
"There is still decent odds of the European situation being contained allowing the US market to press higher in the future. Unfortunately every day that European bond rates escalate only decreases those odds. That march higher for European bond rates needs to stop soon or our markets will stampede lower."
And yes, Thursday was another day where rates flirted with scary levels. That was most evident when the Spanish bond auction went poorly with rates tipping 7%. Having Italy at that level was bad enough. Now we have a 2nd large country like Spain in that same troubling territory. No wonder stocks tanked.
The above action has increased the odds of an ugly outcome in Europe and subsequent damage in the States. That is why I got back to a net short position in the Reitmeister Trading Alert and my personal portfolio. I am still holding out some hope that this can be resolved in a positive fashion. Unfortunately that hope is diminishing on a daily basis.
[11/15/11] Still Only 1 Story to Talk About
You guessed it... Europe. That is the only thing that matters because the US economy is swimming along fine enough. And US stocks are attractive. They simply can't go higher unless the European situation is contained.
Why? A runaway debt crisis in Europe = worldwide recession = stocks head lower.
It's truly as simple as that. Gladly, that is not the only possible outcome. The problem can be contained if the wealthier nations of central and northern Europe want to foot the bill for the rest of them. And they will likely do that if they are convinced that the weaker countries will show serious fiscal discipline going forward.
That is no small feat. And that is why the market continues to bounce around until the issue is resolved.
[10/31/11] After the release of my latest article, I Was Wrong, I realized that some of you may think that I am now a raging bull. "Cautiously optimistic" is a better way to put it. Or simply, I am back to the same Muddle Through Economy guy I was from mid-2009 through early August 2011.
The Muddle Through environment is one where GDP never gets too hot or too cold. It just plays in a range of 0 to 3%, which is certainly under capacity. And unfortunately, unemployment doesn't get much better, which makes it harder to see that growth is actually occurring.
More importantly for stock investors is that corporate earnings growth has been, and can continue to be, very healthy during this period. The level of earnings produced and dividends paid out make stocks more attractive than the other investment options.
So with the Lehman like event in Europe now off the table, investors will likely see US stocks as very attractive. And that is why I think we will likely be flirting with the highs of S&P 1370 by years end.
[10/28/11] After two and a half years of being staunchly bullish, I put out the following bearish call on August 2, 2011:
“Plain and simple, I have become much more bearish about the economic outlook. The anemic ISM Mfg reading + GDP negative revisions = great increase in likelihood of a recession. And now the best case scenario is Muddle Through Growth. But until Muddle Through proves out, then likely people will sell stocks first and ask questions later.”
It certainly was the right call at the time as more economic indicators became negative and the odds of recession increased. With that, the markets continued to tumble and being bearish was very profitable.
That party is now over. And being bearish or believing in a soon-to-occur recession is simply wrong.
Over the next 3-6 months the bias will be to the upside. Likely we will challenge the highs of S&P 1370 at some point in that period. Pushing to new highs may also be in the cards.
It’s the immediate picture that is a bit more puzzling. This recent run of +18% may be exhausted followed by a classic 3-5% pullback. However, crossing above the 200 day moving average, as we did tonight, may have cash pouring in from the sidelines.
[10/25/11] Thanks to Kevin Cook for filling in for me while out of the office. And he ably guided you folks as the market broke above the recent range. This brings me back to my comments from a week ago:
"My guess is that we are being set up for a classic "Suckers Rally". Meaning that the market will break above this range shortly (1120 to 1220). That will create momentum up to the 200 day moving average at around 1276. And just as everyone is getting caught up with bullish fever, the smart money crowd will pull the rug out and we head lower."
Do I still believe this to be true? Kind of. Kind of not.
You see, if I were to just concentrate on the US economy, then I would be bullish right now. Corporate earnings are pretty solid and Q3 GDP coming out this Thursday is expected to be around +2.5%. Yes, that is nearly double the growth of last quarter.
However, the US economy is not the only story. Europe has big problems and big decisions to make. They "hope" to impress everyone with a plan this Wednesday. I read very mixed reviews of what is expected to happen.
I hate to say this, but truly anything can happen at this point. Yes, not the boldest comment I've ever made. However, if you feel the same, then best not to be too long or too short the market. Let things become clearer and then load up for the next leg of the journey.
(I rather have Kevin, since the market is down today..)
[10/24/11] Kevin Cook here, starting off the week for Steve.
Well, it finally happened. The market that was "waiting to go higher" made its move. I am now more convinced than last week that the year will finish strong for stocks. The doubt of many non-believers will only add fuel to the fire. My bumper sticker reads "I Buy Dips."
Yes, the S&P 500 only made a small push above 1,230 to close at 1,238. But it was a week of testing and interrogation -- a full-blown deposition if you will -- where Mr. Market had to make his bullish convictions solid and prove he was worthy of the task. That task is having the confidence to see through the storm clouds of the probable recession and the European "inertia and indecision" show while their house is on fire.
As I wrote in my article Friday, "Bulls Own Rest of 2011," the season is ripe for higher stock prices and that's what the market is telling you. Portfolio managers have the visibility and certainty they need to put money to work in the best place in town to invest. I can now picture hitting 1,300 before year end. That's my view of the direction investment money will flow.
But please check me against our resident quant, Dirk Van Dijk, and his earnings preview before you go all in. It will still be volatile with 189 members of the S&P reporting.
[But what does Steve say?]
[10/17/11] On the back of a strong Retail Sales report Friday, stocks made it to the top end of the range that has been in place since early August (1120 to 1220). In fact, Friday's close is just a notch above at 1224. This has created a bit of suspense as to this week's action.
Do we finally break above or does this rally fail once again???
My guess is that we are being set up for a classic "Suckers Rally". Meaning that the market will break above this range shortly. That will create momentum up to the 200 day moving average at around 1276. And just as everyone is getting caught up with bullish fever, the smart money crowd will pull the rug out and we head lower.
Why would we head lower from there? We need 2 things firmly in place to break above the 200 day average. First, we need economic data to improve beyond current levels. That hurdle is the easier one to surmount. However, the second ingredient is to have the European situation "clearly contained". That will take a lot more time and a lot more proof to satisfy most investors. Without these things solidified I find it NEARLY impossible to get above the 200 day moving average.
[10/13/11] Stocks have been in a very clear range of 1120 to 1220 on the S&P since early August. In fact, this is the fifth run to get above 1220.
Yes, the past 4 attempts have failed. And as of now, this one may be stalling out at the same exact spot. Perhaps it is just going to have a consolidation period before getting above. Or perhaps the party is over and we start heading back lower in the range.
Given the reasonable odds that 1220 will be the near term top, I took profits on 1/3rd of my long positions in my trading account. However, I am keeping the remaining longs as I think that stocks have a decent shot to make it all the way up to the 200 day moving average at 1277. And yes, we could make it there without changing the longer run probabilities that we are in the midst of a bear market.
So as of this moment I will be looking for a spot about 5-6% above Wednesday's close to take long profits and get net short once again.
[10/10/11] Investors were pleased as punch Friday morning with the stronger than expected jobs report. This had us on our way to a 4th straight day of gains. Then the mood turned sour in a flash thanks to Fitch's ratings cuts on Italy and Spain. Next thing you know we are swimming in the red. Then came a bold rally in the final hour that was dashed in the final minutes. In other words... business as usual.
Things are pretty quiet on the economic front this week. Europe and earnings season kick off will be the main attractions. As for earnings, it is not just about whether folks beat estimates or not. Their forward guidance and analyst estimate revisions after the report will be the key. That's because the stock market is always more concentrated on the future, than the here and now. So these are the clues that will tell us about where we are headed.
My bet is that we have more upside ahead of us in the near term because things are currently better than the low, low, low expectations. After that little sugar rush wears off, the concerns about what lies ahead will return. Likely leading to a retest of recent lows.
[10/5/11] Volatile doesn't even begin to describe the insane 376 point rally at the end of the session on Tuesday. At least for now investors are saying that they reject the breakout to the downside we saw on Monday. So likely we are back in the range that has been in place since early August.
The most striking thing about Tuesday's action was the supreme outperformance of smaller and riskier stocks. This can be seen very clearly by the Russell 2000 index rising nearly 3X as much as the large cap oriented S&P 500. This was a major reversal of the "flight to safety" trade that levied much harsher punishment on those same R2K shares.
What happens next is much more interesting than what just happened. Meaning, is this just a quick relief rally before we retest the lows again? Or was that a capitulation rally that marks a bottom for a renewed and lasting bull run???
I am guessing this bounce may have a little more legs before we are right back here testing new lows. Something tells me that we have to reach Dow 10,000 at a minimum before the beast is satisfied. And if a real recession is coming, which I think it is, then Dow 10,000 would be the ceiling from which we seek an even lower floor. The fresh jobs data on the way this week may hold some clues.
[10/4/11] The last two months we have been inside an S&P 500 trading range of 1120 to 1220. By the end of September we were pressing against the lows and wondering if the support would hold. Then comes the first trading day of October where Mr. Market kicked down the doors making new lows at 1099.
Granted, this move could be rejected Tuesday with a bounce back above 1120. However, I sense we will be probing to lower lows from here. My guess is that we will flush a good 5-6% lower to around 1040 on the S&P which corresponds with Dow 10,000. There should be very strong support there and I will be tempted to play a short term bounce.
Would that be bottom? Yes, if there is no recession in our midst. And no, if a recession comes a calling with subsequent earnings and share price declines. I'll keep you posted on my thoughts as we get there.
[9/27/11] Why Did Stocks Soar on Monday?
Because everyone and their mother thought it would go down. That is just Mr. Markets way of keeping everyone on their toes.
Unfortunately the economic data in the US and around the world continues to get worse. Plus, the latest whispered Eurozone solution does not impress me any more than the 193 hasty solutions created before it. So I do not think for a second we are out of the woods and thus we will likely soon be re-testing the lower end of the recent 1120 to 1220 range on the S&P 500.
[9/26/11] On Friday the market see-sawed back and forth. In fact, it was in the red 6 times until in the final hours it nudged out a modest gain.
Sorry friends, but that is not the typical signs of a capitulation rally. Generally that brings a strong, clear and large move to the upside. This was none of the above.
That means we will be battling over the low end of the range once again this week. Plenty of economic reports and events in Europe are on the slate which could push the market in either direction. I will stick my neck out once again and say the most likely outcome is a breakout to the downside. Hopefully you are prepared to profit from it.
[9/19/11] The Last 2 Times Stocks Rose to this Level...
Stocks enjoyed a solid 5 day rally last week. However, they have now rallied up to a level we have reached twice before... just before collapsing. Yes, on August 15th and August 31st we got just above 1200 on the S&P 500 and then found ourselves 5-7% lower a few short sessions later.
Will this time be different?
The answer is yes, if investors are more convinced that problems are solved in Europe and the US economy improves.
The answer is no, if Europe keeps slapping little "Hello Kitty" Band-Aids on their gaping sores or if US economic reports come in like Friday's Consumer Sentiment reading... which is at levels that have spelled recession each time in the past.
Given the recent run up, I am back to a net-short position preparing for a ride lower. I will gladly don the Bull Suit that is gathering dust in my closet if the economic data improves. Until then it's best to play the cards you are dealt. And this hand says look out below.
[9/17/11] Many investors are drooling over the perceived values they see in today's stock market. However, many of these people are falling into a dangerous trap that will lead to horrific losses in the days to come.
Below I will detail the mistakes these investors are making, so you can avoid the same fate. Plus I will give strategies to make money in the current turbulent market environment and the years ahead.
Looming Recession = 40% Drop in Stocks...Or More
Certainly I'm not the first guy to warn you that a recession is likely on our doorsteps. You don't have to look far to see the signs:
• US Debt out of control
• Consumer Sentiment is plunging
• Manufacturing sector is contracting
• No Jobs Growth...and signs of getting worse
• Oh, did I forget to mention the European Debt Crisis?
I could go on, but I think you get the point. And the sad fact is that the average recession brings about a 40% decline in stock prices. Unfortunately this has the markings of an even worse than average recession, and thus worse than average bear market.
Why Do Stocks Decline So Much?
It's really a simple 2-part equation:
Part 1: Earnings Drop 20%: Recessions mean that economic growth heads south. This lowering of demand is disastrous for corporate profits with an average 20% decline. Note that the recession of 2008/2009 saw profits decline by more like 50%.
So anyone measuring a stock's value based upon its most recent earnings, or current earnings estimates, is seeing a "value mirage" that disappears as the recession unfolds.
Part 2: P/E Drops About 20%: As the bear market keeps mauling stock prices, investor emotions quickly swing from greed to fear. And that fear greatly depresses their desire to take on risk. The result is that the P/E paid for stocks will go lower by about 20% as well.
Now add those two parts together and you can easily see how stocks can be cut by 40%. So the current 11% decline in the market from the recent peak is nothing but a scratch on the surface of where things are likely headed.
Are you getting depressed? That is certainly not my goal because...
Bear Markets Offer GREAT Profit Opportunities for Investors
The playbook for most investors has only three pages:
Page 1: Buy and hold stocks for the long haul.
Page 2: After stocks drop 40%, and I freak out, then go to cash.
Page 3: Pay huge fees to brokers and mutual fund managers no matter what happens.
Yes, most investors buy high and sell low, leading to horrific results. Yet it doesn't have to be that way. So time to burn the old playbook and start over with this one page manifesto:
• When the economy is going into a recession, then short stocks or buy short ETFs to profit from the ride lower.
• When the recession seems at its full zenith, and everyone is in a horrible panic, then BUY, BUY, BUY the best growth stocks at phenomenal discounts. Then take your profits when the next recession is in the air.
• Rinse and Repeat as needed. Retire young. Send Thank You note to
Steve Reitmeister ;-)
[Actually this was the front end to a pitch for you to buy the service "Reitmeister Value Investing" -- only $299/year with a double-guarantee!]
[9/13/11] It is only fitting that the #1 movie at the box office this weekend was "Contagion" and that is exactly what investors fear will happen in Europe. In fact, Greek bonds are now being priced assuming a 98% likelihood of default. But Greece is not the real problem. It is the concern that their troubles may spread to more and larger European nations creating a "Lehman" type event.
With that backdrop, shares plummeted to as low as Dow 10,825 on Monday. This is fairly close to the lows established on August 10th and the 19th that were followed by sizeable relief rallies. The downside of those previous bounces is that they both fizzled and we found ourselves back at the lows again.
Yes, the 3rd time could be the charm and this bottom may hold. However, with European troubles far from resolved, and general concern of a US recession, I would not bet on that happening. Unfortunately the next wave of fear could press us well below those levels with Dow 10,000 as a likely destination. Play your cards accordingly.
[9/1/11] The ADP employment report came in at +91,000 which was about 20% under expectations. And with that stocks went higher.
We've seen a lot of that lately as stocks are shaking off weak economic news as it continues to rise. There are 2 reasons for this:
Technical Reason: The chartists here at Zacks tell me that the stock market usually retraces to the 50 day moving average after a major decline. That would be around 1260 on the S&P 500. These technicians are not necessarily predicting a rise above that. (And neither am I).
Fundamental Reason: The worse the news the more likely we see Fed or Government intervention to which indeed could spark the economy and therefore stocks. So each bout of bad news increases the odds of this happening.
So why am I still bearish given the notions above? Because the market moves over the long haul based upon the fundamental outlook for corporate earnings. So easy to write off the short term technical picture as that has no bearing on the main issue.
It is tempting to believe that a new round of stimulus or QE could cure what ails us. Unfortunately, it is most likely too late to fend off the looming downturn given the current fear of the populace. This leads to plummeting demand which makes businesses less likely to invest in expansion. This dastardly combination usually spells recession and lower stock prices.
[8/30/11] The Dow surged 254 points on Monday to close at 11,539. We had a similar rally just two weeks ago when the Dow tacked on 213 points to close at 11,482 on August 15th. That rally ended with a thud as we found ourselves back at 10,817 after 4 straight days of beatings.
Is this time different? Unfortunately I do not see a single piece of economic evidence that makes me feel better now than I did just 2 weeks ago. In fact, the negative revision on Q2 GDP from last week plus collapsing Consumer Sentiment only has me feeling more negative about where we stand now... and where we are likely going. So I took some more profits on long positions Monday and find myself strongly short the market as I expect we will be heading lower soon.
Note that if you have a 2+ year time horizon, then yes, you can snap up some blue chips now paying great dividends to weather any potential storm. But if you have more of a trading mentality, then I recommend that you prepare for a leg lower.
[8/26/11] Kevin Cook here, continuing to offer a bullish counter-argument to every one of Steve's bearish diatribes. If I find out he's in Jackson Hole trying to talk Bernanke out of QE Next...
I said yesterday that this current relief rally in equities does not live or die by the mouth of the Fed Chair. That's one trader’s opinion. I could be wrong. But do you take positions on such things anyways? I still hear market participants say that the monster rally which began last September was fueled by QE2 and I disagree.
The market last fall was oversold by many metrics and we experienced a terrific earnings-driven surge as hundreds of US corporations across all sectors continued to crush their numbers and raise guidance. Sure, a little bond buying by the Fed—okay, a lot—kept the yield curve sweet. But that wasn't the main driver.
And I think that this market was destined to test the last swing highs just above S&P 1,200 following the terrific test of the 1,120 level last Friday and Monday. Markets move on emotional extremes and we are due for a swing of optimism before we get confirmation about how bad this "probable recession" could be.
[8/5/11] As I suspected, the bounce on Wednesday was nothing more than a relief rally. And so on Thursday investors got back to the business of selling stocks at a furious pace.
There are a million little reasons for this move that other members of the investment media will discuss. However, it can be simplified as follows.
The odds of a recession have increased. And the average stock market decline during a recession is around 40%. So with much greater risk to the downside, investors are fleeing stocks in a hurry. I sense we will make it down to around 1151 for the S&P 500 on this leg of the journey. What is so special about that level, you ask? Because nearly every time the stock market has declined greater than 16%, it signals a recession and further stock declines. 1151 is the 16% mark from the recent highs. Put a note on your computer to watch what happens as we approach that mark.
My gut tells me that this downward move will make it to right around that neck of the woods, which is about 4% lower than now. If stocks bounce higher, and stay higher, then it's because investors are feeling better about the case for Muddle Through Growth than for a recession. If we fall through, then watch out below!
If you have not already gotten defensive or bought ETF shorts to profit from this move, then still a little time left. Please don't procrastinate any longer. Too many investors stick their heads in the sand at times like these. That is a sure fire way to get your clock cleaned.
[8/4/11] After 7 straight days in the red, stocks bounced modestly higher on Wednesday. Yes, it could be a lasting bounce. But unfortunately I sense this was nothing more than a relief rally. The main impetus behind the move was that some investors noted the market was "technically oversold". Then toss in renewed hopes for the Fed to step in with QE3 and stocks nudged higher.
The sad fact is that the Fed has already used up all the really good ammo in the first couple rounds of quantitative easing. So at this stage, QE3 may be like coming to a gun fight with a butter knife (a plastic one at that). So if investors are hanging their hopes on QE3, then they might as well ask Santa and the Tooth Fairy for help too.
I stand behind my call yesterday to get more defensive. In fact, this near term bearish view was only bolstered by the unimpressive showings from the ADP Employment and ISM Services reports. ADP shows jobs growth, but not at a pace that will lower the unemployment rate any time soon. Whereas the ISM Service Index is moving ever closer to showing a contraction for the largest parts of our economy.
For full disclosure, these events emboldened me to move my portfolio to 50% short the market. Meaning that I will make money in the near future as the market goes down. I think the odds are strongly in favor of that happening over the next 1-2 months. From there I am hopeful that the economic data points to Muddle Through Growth and stocks start to progress higher. If that is not the case, and the odds of a recession increase, then I will become even more aggressively short the market.
Remember you can make money no matter what the market does. Stay engaged with us and we’ll show you the path to profitability.
[8/3/11] Yesterday I laid out the case for the potential need to get more defensive in a hurry with the following statement:
"If we flush below Dow 12,000, then we are under significant technical and psychological support and could head 5-10% lower in a hurry…we need to watch things very carefully here and change strategies accordingly."
Personally I took yesterday's move under 12,000 as a clear sign to alter my portfolio from the previous 100% long status to 0% long (meaning my longs and shorts equal out to 0% net long exposure). That neutral stance is the most defensive I have been since March 2009 and is a serious statement about how bad it looks out there. Not just from a technical perspective. But from the more important fundamental perspective.
[wasn't March 2009 the low??]
Simply, the economic data is not good. The final straw for me was the hefty negative revisions to GDP plus an ISM Manufacturing survey that is teetering on a negative reading. This now has me contemplating a 50% likelihood for a recession on the horizon. That leaves 50% likelihood of Muddle Through Growth which would provide modest gains for stocks going forward. The problem is that far too many investors were expecting better than Muddle Through Growth for the 2nd half of the year. As those investors ratchet down their expectations, they will also decrease their risk appetite for stocks.
Barring some significant improvement in economic data (like Jobs or ISM Non-Manufacturing, both on tap this week) then I foresee a trip down to Dow 11,000 as an almost certain event. Hopefully the Muddle Through case does emerge victorious after that and there is no need for more pain. Unfortunately if the economic data continues to sour, then Dow 11,000 is not the last stop on our downward descent.
So yes, I do recommend that each of you consider a more defensive strategy at this time. As the new data unveils itself I will share updates on that strategy.
[7/28/11] Investors were already in a bad mood Wednesday morning because of the looming debt ceiling deadline. Then came a dismal Durable Goods report showing surprising weakness in the manufacturing sector. The combination of these two events had the Dow sagging by 100 points. And just when things couldn't get any worse...they did just that. Around 2pm ET investors got "very blue" after reading the Fed's Beige Report. It still shows signs of growth throughout the country. Unfortunately the pace of growth seems to be moderating in some regions. From there the Dow lost another 100 points.
Does this change my recently stated positive outlook for stocks? No. The prospects for stocks is still quite positive 3, 6, and 12 months down the road. Yet, I certainly appreciate why the near term picture is shaky as our politicians play a dangerous game of chicken with the debt deadline less than a week away.
I still foresee some kind of deal being made in the nick of time. And yes, it probably is a kick the can down the road type of deal. That is fine as perhaps it should be the central issue of the 2012 elections. Let's have the voters decide what path they want to take in the future.
Most flavors of a deal that will be emerge at this point will likely be enough to get investors off the panic button and focus on the fundamental merits of stocks. With corporate earnings still very strong and cash investment alternatives paying next to nothing, then stocks will continue to have great allure. That is why I continue to be firmly long this market.
[7/25/11] Last week was very good for the stock market thanks to strong corporate earnings and elevated expectations that some kind of debt deal will be struck before it's too late. The Dow is now just a mere 1% below the recent highs. The S&P 500 is a smidge further away at 2% from its highs.
No matter how you slice it, the table is set. Stocks want to break out higher given the fundamental strength that is clearly evident in the earnings reports. However, the media and our politicians told everyone that August 2nd is day one of a "Financial Armageddon". So it will be nearly impossible to break to the new highs without this issue being settled. Hopefully this week we get a meaningful solution to that matter that gets us to Dow 13,000 in no time at all.
[7/13/11] Tuesday was a crazy day. When the rooster first crowed pre-market futures were down violently given fresh concerns from Europe. Things mellowed enough over the next couple hours to produce a breakeven open. That's where we stood most of the day until just after 2pm ET when the Fed minutes were released. From there traders got giddy with the thought that the Fed would be ready to step in with yet another round of quantitative easing if the economy softened further. Next thing you know Moody knocks Ireland bond ratings down to junk status. That knee in the groin led to a finish firmly in the red.
What does it all mean? Traders have no idea what to focus on and thus are overreacting to each fresh piece of news. This is where patient investors have a great advantage over short term traders. We can weigh the preponderance of the evidence and not be swayed by each data point as it emerges.
For me the evidence stacks up in favor of Muddle Through Growth for the US. This will lead to higher corporate earnings and chip away at the unemployment rate. Yes, it's a longer and slower slog then any of us would want, but it is vastly better than being stuck in the Great Recession. So with corporate earnings on the rise and interest rates so low, it will create a siren's song towards stock ownership. Meaning each dip at this stage is another opportunity to buy attractive stocks on the cheap.
[6/28/11] Dow 12,000 continues to show that it is neither strong resistance nor strong support. That's because we have cut through it so many times like a knife through butter. Interestingly Dow 10,000 was the same. We battled over that territory for almost an entire year between October 2009 and September 2010.
I'm sure we'd all like to think that the tussle with 12,000 is now over, yet there is still too much doom and gloom in the air to make that assumption. Gladly expectations are nice and low coming into the July earnings season. A strong showing there and we probably rise above 12,000 for a good stretch. Unfortunately that leaves far too much of the summer, and its natural pessimism, for us to feel comfortable just yet.
That is another way of saying, expect more of the same battle over 12,000 for the next couple months. Yet since I don't think we will go that much lower than there, a patient investor can snap up the values now and wait for a nice payday by year's end.
[6/13/11] Friday's debacle made it 6 straight losing weeks for stocks. The last time that happened was in 2002 when everyone got their clocks cleaned by that nasty bear market. This slow grind lower in 2011 now has us back under Dow 12,000 for the first time since March.
The reason for the decline is simple. Recent soft economic data has too many people thinking the worst...recession. That "glass is completely empty" kind of thinking is way over done. You see there is a great deal of difference between soft data and scary data.
Soft data = still showing growth, but just not as impressive as before.
Scary data = expansion is over. Here comes the recession. Watch out below!
So there still may be a bit more shakeout until the perma-bears are satisfied. But once more people appreciate that we do have positive GDP growth. And earnings are headed higher. And there is no other place to put your money given low interest rates...then stocks will start to rise again.
[6/6/11] The May Jobs report was stone cold terrible. Pre-market futures plummeted within seconds of its release. Then a half hour after the open we got a slightly better than expected ISM Non Manufacturing report that tempered some of that bad mojo...not by much.
Where to from here? I think the bias is still towards the downside given the soft economic reports of late coupled with the general foul mood of investors. (That foul mood seems to be an annual event every summer. This time is no different).
Dow 12,000 is the next resistance point. If that gets taken out then we will likely test the 200 day moving average at around 11,600. That is probably as much damage as we will see before July earnings come out which hopefully show everyone that Muddle Through growth is the current reality and not something more ominous. That should lead to a bounce from oversold conditions. Until then it is best to be a bit more defensive. Ultrashort ETF's are the quickest and easiest ways to buy that downside protection for your portfolio.
[6/2/11] The market pendulum took a big swing back towards fear on Thursday. That's because more and more important economic reports are coming in weaker than expected. The latest being the ADP Employment Report and ISM Manufacturing Index. Each was a lot lower than estimates.
Yes, I am one of the guys who has said that "soft" reports like these are not a sign that the economy is going to contract. But certainly each new poor report increases the odds that the economy will have a lower growth rate than previously expected. And as we know from the earnings world, missing expectations is more important than the actual level of growth produced.
When you add it all up, I still expect Muddle Through growth for the US economy in the neighborhood of +2%. Just not the 3%+ growth rate that most other economists were projecting. So as investors adjust their expectations downward, with some even calling for a new recession, then stocks will most likely head lower in the near term. When the smoke clears and the Muddle Through growth scenario emerges, then likely stocks will rebound from oversold conditions and we will make new highs later this year or early next.
Strategy: Expect more pain in near term. Probably 5-10% correction from here. Hold on to your favorite stocks you like for the long haul. Sell off some of your more aggressive/speculative picks which will likely fall the most. Maybe even pick up some short ETF's to profit from downward pressure. Then look for spots down the road to load up on more Zacks #1 Ranked stocks trading at great values.
[3/24/11] As expected we probed the underside of Dow 12,000 early in the session Wednesday. From there stocks rallied strongly into the finish. Yes, it is encouraging that Dow 12,000 has held up as support for three straight days. Unfortunately, I am not wholly convinced that this is our last time under that key level.
Why? Several economic threats continue to circulate out there and it will be hard to move significantly higher until more are resolved satisfactorily. For example, just as we were ready to forget about problems in Europe, we see that new austerity measures in Portugal have been voted down. This will most likely lead to further concerns over their nations stability and a possible bailout by their EU brethren. And don't forget that oil prices have not yet subsided, which leads to inflation and corporate profit concerns.
I still believe the odds for continued economic expansion and a rising stock market are in our favor this year. Unfortunately we are going to have to resolve some of these looming issues before we can press much higher.
[3/23/11] As expected, Dow 12,000 was tested on Tuesday when the index got as low as 12,003. Yet with it only bouncing up to 12,019 at the close, it wouldn't take much negative sentiment to have us testing that key level once again.
Looking back over the last couple years, each thousand point climb from the bottom resulted in an important testing period. Most of the time it was fairly easy to continue higher. However, Dow 10,000 gave us a heck of a struggle as we crossed above and below that point many, many times throughout 2010.
Will Dow 12,000 fold easily like the other milestones? Or will it give us fits like Dow 10,000? My unfortunate sense at this time is that it will linger around longer than we would like. Yet still I am counting on more upside for stocks by year's end.
[3/22/11] It didn't take long to bounce back above Dow 12,000. The move makes perfect sense as investors started to realize that events in Japan actually have very little negative economic impact on the US economy or stock market.
Where to from here?
The bias is still towards the upside in the long run. In the short run, I think we might need to test the underside of 12,000 once more to solidify it as a serious level of support for our future advances. However, I would be truly shocked if stocks took out the high of 12,400 before we get a read on the quality of corporate earnings in mid April. So that frames my current expectations and just so glad that we did not succumb to the unnecessary panic of last week's dive.
[3/21/11] The market continued to rally for a 2nd straight session on Friday as more investors realized the attractiveness of stocks given this correction. This matches up nicely with my prediction from Thursday morning where I noted that we should bounce from the recent oversold conditions and then...
"From there we will probably race back to Dow 12,000 fairly quickly. Then we will wait for the results of 1st quarter earnings season in April to determine if we are ready to take on the old highs at Dow 12,400."
Friday's close at Dow 11,859 says that this prediction looks on track so far. Dow 12,000 will be the real battle ground. Kind of like a strategic hill that we need to re-capture in the midst of a long war. Once re-captured it should help support further advances.
[3/18/11] It sure was nice seeing all those profitable green arrows next to my stocks on St. Patrick's Day. However, I am concerned that was more of a relief rally than a true capitulation.
What's the difference, you ask? Capitulation is where stocks are so oversold that it marks a clear bottom from where stocks bounce higher and stay higher for a long time. A relief rally is just a blip higher before more losses get leveled on investors.
Time will tell which is the case. For now assume more volatility in the short run which should evolve back into the reassertion of the bull rally.
[3/17/11] Sorry that I am playing like a warped record, but there is simply no sound fundamental reason for the market to decline given what is happening in Japan. [In other words, the market was wrong -- I was still right.]
It reminds me of what the stock market does every time we've gone to war in recent history. At first stocks tank because of the increase in fear that comes along with the idea of armed combat. Then about a week later investors start to realize "Hey wait a minute. Going to war means the government will spend tons of money and that is good for the economy." Subsequently the market rebounds with a vengeance.
Certainly that is what happened in March 2003 when the US invaded Iraq.
The devastation in Japan has similar dynamics to the scenario above. Thus, I believe we are nearing a classic capitulation moment where investors say "enough is enough already". From there we will probably race back to Dow 12,000 fairly quickly. Then we will wait for the results of 1st quarter earnings season in April to determine if we are ready to take on the old highs at Dow 12,400.
[3/16/11] It looks like my pre-market advice, to not give into the panic Tuesday, was the right call as the market rebounded substantially by day's end. Here is a link to that article in case you didn't see it already:
The Only Thing We Have to Fear Is Fear Itself
So what do we do now? For me, it is the same advice as given in the article. The short term correction is overdone compared to the long term positive fundamental reality. So, I am prepared to weather the short term volatility until the bull rally restarts. Hopefully you have the fortitude to stay the course as well.
[note: after today, it sure looks now like that "right call" was wrong]
[3/9/11] Stocks were weak early on Tuesday before rallying strong into the finish. I think this is further proof that we are stuck in a trading range between Dow 12,000 to 12,400 (recent highs). We will break above that mark when investors are convinced that recent economic strength continues despite oil price concerns. We will head below 12,000 if fears of rising oil prices has investors certain that it will stamp out recent economic gains.
Which do I think will happen? I bet that the economic growth story emerges victorious and the two year old stock market rally extends higher. However, I do sleep with one eye open in case the gloomier outlook prevails. We shall see.
[3/1/11] Even with the modest, end of the month pullback, February saw gains of +3.2% for the S&P 500 index. That makes three straight months of solid gains. And going back six months we see that the S&P has rallied an impressive +26.5% in that stretch.
Certainly that begs the question; Where does the market go from here?
I expect range bound activity for a while with the recent highs (Dow 12,400) capping the upside and Dow 12,000 marking the bottom. Call it a trading range. Call it sideways action. Call it consolidation. Call it what you will, but I just think that stocks will have a hard time getting markedly above these recent highs until we get more proof of the quality of Q1 business activity. That won't come until earnings season starts up in early April. With all the profits in hand these last 6 months it's really hard to complain about a trading range period now.
[2/24/11] The sell off extended for a second day, which is a surprise to no one. The Dow got as low as 12,063 before bouncing back a bit. Sure it's possible this could just be a two day correction. However, I highly doubt that stocks can move higher without scaring investors a bit more. Most likely an intraday dive under 12,000 is what is in the cards and then we wrestle over 12,000 once again.
Once this test of investor conviction is done, then Dow 12,000 will most likely become a firm level of support from which the market can press to new highs. And that will happen because the economic recovery continues on track no matter what is happening in the Middle East. This will likely be apparent in the Durable Goods report on Thursday and revised Q4 GDP on Friday. If for some reason these reports show weakness, then yes it is possible to spend a little time under 12,000 until the preponderance of economic evidence helps to push stocks higher again.
[so yesterday, he says he highly doubts Dow under 12,000. and today, he says most likely the Dow will dive under 12,000 intraday.]
[2/23/11] The market had to correct sooner or later. So the rising tensions in the Middle East offered the best excuse for it to happen now. Yes problems in those areas could cause oil prices to escalate further, which would be like an extra tax on the US economy. However, it certainly will not derail the US recovery.
So this is just the long overdue pullback that stocks needed. I highly doubt we will fall below Dow 12,000. Afterwards the bull rally will resume, but profits will probably come at a slower pace than we saw of late.
What does a correction mean for Zacks #1 Ranked stocks? In general, the more a stock has gone up recently, the more it will decline on the pullback. Don't try and read more into the moves than that. Just hold on to your #1 stocks with full anticipation that they will be producing solid outperformance after the correction is over. And if you don't have many Zacks #1's in your portfolio, then now is a good time to grab them at discounted prices.
[2/11/11] After 8 straight winning sessions for the Dow investors were dead set on a sell off Thursday. This bearishness was especially in the cards for tech stocks given a miserable earnings report from Cisco. Yet the great news on the jobs front could not be overlooked for long. As the day progressed the clear benefit of the sub-400,000 jobless claims report turned sellers into buyers and the market worked its way back close to breakeven.
However, days like Thursday are often signs of a short term top. Meaning that a bull rally often runs out of steam after it turns one or two negative starts into strong finishes. Kind of like a marathon runner sprinting the last hundred yards to the finish line before collapsing.
Again, I am only talking about a short term top where perhaps we retest Dow 12,000 before heading higher again. For me that is too small of a space to even trade. And since it is only a short term "possibility" in the midst of a long term bull rally, then I would just rather stay fully invested in my favorite stocks. That is what I will do. Hope you do the same.
[2/9/11 a.m.] This bull rally continues to impress. Stocks have gone up for 7 straight days and in that time racked up 411 points on the Dow to a new closing high of 12,333. Investors who have not been on board the rally keep praying for a correction to buy stocks on the dip... and that is exactly why there is no correction. The market wants to make as many people look foolish as possible. And since the bearish camp is still the largest group, then Mr. Market is happy rubbing these fresh gains in their faces.
As noted yesterday, there is always a correction around the corner. My guess is that it won't happen until most bears finally change their stripes and succumb to the bull rally. Once on the bandwagon, then there will be fewer fresh buyers for a while which usually means a correction.
The key all along has not been one of timing. Rather it is simply an understanding that an improving economy is a great tonic for the stock market. As long as that is in play (and it clearly is) then best ride the bull rally. No sign of that changing any time soon.
[1/25/11 a.m.] Monday was light on the news front. So in that vacuum the strength of recent good news greatly outweighed the bad allowing stocks to advance higher once again. But now we are pressing up an important level of psychological resistance at Dow 12,000.
Going back over the past couple years you will see that every 1000 point advance was met with a period of resistance. Or at least a period of consolidation before stocks could leap above and, more importantly, stay above that new hurdle. I suspect we will do the same thing here. Maybe see a 1-3% correction at the worst. Then build up steam to move above to yet greater highs.
Why move above? Because the economy is rebounding + corporate earnings are exceeding expectations once again + stock valuations are reasonable compared to historical standards. That is a compelling equation for stock investors at this time.
[1/13/11 a.m.] how high can we go? I think that Dow 12,000 will provide a top for stocks in the near term even if earnings season is strong. Perhaps we then see a bit of profit taking in the 2-5% range. This resting period will allow us to gain the strength necessary to press through Dow 12,000 with Dow 13,000 being a very likely target to hit before year's end. If we hit that mark is not really the question to me. Only when.
[11/15/10] You could say the market made two big steps forward in September and October. And now we are taking a step back in November. So let the double dippers beat their chests for a while. The fact remains that the economy is getting healthier and corporate earnings are on the rise. Those are the two greatest predictors of future share price performance. And both are in singing in unison that there are more gains ahead.
As for this recent stock shake out, I wouldn't be surprised to see us test Dow 11,000 before getting a bounce. Maybe 10,920 at the worst, where we have support from the 50 day moving average. That would be a healthy correction that gives us plenty of time for a traditional holiday rally to wind up the year further in the plus column.
[10/20/10 a.m.] After stocks enjoyed their biggest September rally in 70 years it's not all that surprising to have a "buy on rumor, sell the news" style earnings season. Meaning that in general, most stocks were bid up in anticipation of delivering strong earnings reports. Gladly the vast majority of these firms are delivering on that promise, but selling off afterwards on a wave of profit taking. This too shall pass.
When the smoke clears the earnings estimates for US stocks will be higher than before earnings season. This has traditionally given cause for the market to rise and see no reason why it won't this time around either. That may start again today. Or next week. Or next month. But I am highly confident that 3-6-12 months down the road the market will be higher than it is today. So buy quality stocks on the dips and give a small chuckle to those foolish enough to head out because they didn't understand why their stocks sold off after the earnings reports.
[10/7/10 a.m.] After a big rally on Tuesday, most would have expected some hefty profit taking on Wednesday. In that light a nearly breakeven finish is impressive. There is growing talk of a "Win-Win" scenario for the market. The belief is that if the economy rebounds on its own, then corporate profits and share prices will continue higher. On the flip side, if the economy weakens then the Fed will step in with more quantitative easing (playfully called "QE2") to help fuel growth. With this in mind the market has been rallying on days with good news and bad news alike.
[9/27/10 a.m.] Why did the market explode higher on Friday? Maybe because it often does the exact opposite of what makes sense. Yes, you might read articles that say the Durable Goods report was the reason for the market to roar higher. Hey folks, it wasn't that good, or durable of a report to make investors feel like our economy is in great shape. Some other experts may point out that this is a short covering rally. Meaning the hedge funds and traders are taking their money out of recent shorts that are now going awry and that creates additionally buying pressure that moves up the market in the short run. Perhaps that has some validity. And some other experts will talk about how we have gone above key technical levels that are bullish indicators. (Hey, weren't these same technicians boo-hooing about the Hindenburg Cross just a few weeks ago and how that spelled doom for the market???)
Add it all up and we see why investing is so tricky. And why it's hard to be 100% bullish or 100% bearish sometimes. The key is to strike a good balance between the possibilities of what might happen. Meaning that when you invest you have to realize there are good odds you can be wrong. So best to hedge your bets a little to realize that the other side of the argument may have some credence.
[9/13/10 a.m.] The market notched it's second straight week of gains. Why? Because there is more and more proof that we will have a slow growth economy and not a double dip like many fear mongers were preaching. With that being the case, stocks are MUCH more attractive then bonds. This is especially true when you can easily get a dividend yield equal to the 10 year Treasury with decent odds of capital gains to boot. That is not to say that the market will continue to rally higher and higher. Rather we might be entering a period of less volatility and gently sloping upward action. Let me stress the word "might" because the thought of a double dip is certainly not fully removed from our collective conscience. So in the short run anything is possible. Over the long haul I like our odds much better in stocks than any other investment class.
[9/3/10 a.m.] I am reminded today of the old investment adage "the market climbs a wall of worry". Meaning that often when things look bleak, the market puts in some of its most impressive gains. Certainly we see that being true as we look back to March 2009 when the market rebounded ferociously in the face of still dire economic news. So it's quite possible we are seeing the same thing taking place here as the market is rising without the benefit of great economic data. Then throw in that the market has crossed above the 50 day moving average and might be ready to extend higher from here. So I am willing to take my foot off the brake a bit more. Meaning I have cut my short positions and am now more long the market. Of course, if this is a false rally, then it's always easy to quickly throw another short into the mix for downside protection.
[9/1/10 a.m.] We close the books on August stuck in a fight over Dow 10,000. We won't stay in this deadlock for long given the slew of jobs data due out this week starting with ADP payroll report on Wednesday capped off by the August Employment Situation on Friday. Throw in another speech from Bernanke on Thursday and the market will have plenty of fuel to spark a rally. The only question is whether that rally takes us above or below 10,000??? Right now I have a fairly balanced portfolio with both long and short positions. So I am prepared for either outcome. But if you put a gun to my head, I would bet we head lower on the news in the short run. Then look for a capitulation point nearer to 9600 which hopefully should supply a meaningful bounce.
[8/30/10 a.m.] We didn't spend much time under Dow 10,000 thanks to three "decent" showings on the economic front. Unfortunately I don't think we are going to spend much time above 10,000 either.
Why's that? Because each of the economic releases has a big "BUT" attached to it.
For example, GDP was revised down to +1.6%. That's better than expected, BUT shows slowing growth. Consumer Sentiment was solid...BUT below expectations. Ben Bernanke says exactly the same thing as last time...BUT for one day at least, the market responded well to it.
As you probably recall I am in the Muddle Through Economy camp and believe we will have low to modest growth for at least a few years to come. The news today would seem to support that notion.
However, there are a lot of folks out there who believe in double dip or worse. I doubt that any of them truly changed their mind after today's news. They can still say "Hey, GDP is slowing down considerably. Watch out for negative #s in the 2nd half".
So until 3rd quarter earnings season and GDP comes around to give a fresh read on where we stand, then I think the bears will be in control of the market. And right now I don't think they will be happy until the lows of early July are tested around Dow 9600. At that point my fellow Muddle Through'ers should say "enough is enough already" and buy up stocks at attractive prices.
[8/25/10 a.m.] The market was already in a bad mood Tuesday before the horrific July home sales numbers hit the wire at 10am ET. From there we plummeted right to Dow 10,000 and then bounced back...a little. I wish that Dow 10,000 had a better track record of providing support. Unfortunately we have gone through it many times like a hot knife through butter. And right now the Bears are hungry. So I suspect we are going to have a trip under. Probably on our way to test those lows from July 2nd at Dow 9600. Again, my fundamental view says there is no good reason for the market to fall further than that. It's not to say that everything is rosy out there. But after 2nd quarter earnings season estimates went higher for the broader market which is bullish and bond rates plummeted. Plain and simple, stocks are a better value than bonds...by a mile. So I will be looking for buying opportunities on any upcoming dips.
The bulls are clearly in charge as the market surged to new highs yesterday. From this lofty perch I have little doubt we will reach out to Dow 11,000. However, will we hold that level? I don't think so this time around. We need a bit more confirmation from 1st quarter earnings and then perhaps cross over 11,000 to even greater heights. In the meantime we can enjoy the gains in hand so far this year.
Like I said yesterday, the Tuesday rally was a mirage. This proved out with the intraday collapse of the market on Wednesday when the Fed's Beige Book was released. What was so horrifying in that report to spark the sell off? It's a contrarian thing. So hang in there with me minute as I try and explain. The report sang from the same song sheet as Bernanke the past couple days; "Economic recovery on track. Most every indicator improving. But jobs will be weak for a while." That sounds pretty good, right? We'll not if you are a believer that the European debt issues will derail this recovery over coming quarters. So if the US economy right now is ONLY lukewarm, then how bad will it look when the slowdown in Europe hits our shores??? That is the thinking that went into the decline. So expect some more time under Dow 10,000.
Executive VP, Zacks Investment Research
Dow gains 273 to go over 10,000
Stocks rallied nearly 3% on Tuesday. Why?
Theory 1: Relief rally, yet bears still in control.
Theory 2: Bear rally is over and bull rally resumes because recent fears about Europe slowing down are overdone given that Chinese exports still surging.
Theory 3: "Stuff" happens. And no clue what stuff happens next.
I am hopeful that Theory #2 proves out. But until we cross above the 200 day moving averages for Dow and S&P, then still need to assume that Theory #1 is still in effect. The market has to rise about 2% from Thursday's close to make that happen.
Executive VP, Zacks Investment Research
[6/14/10] The market did make a run at the 200 day moving average early on Monday. Unfortunately that bullish surge was roundly rejected leading to a negative close. This is the 4th such failed attempt to get above the 200 day average since the market fell under on May 20th. I sense that if we do not get above this week, then we are probably stuck below until earnings season starts up in July.
[6/17/10] The breakeven finish on Wednesday means that the market has closed above the 200 day moving average for two straight sessions. This is a very bullish sign and greatly increases the odds that the market will press higher from here. With all that being said, I am still a bit uncertain. What if the weekly Jobless Report on Thursday is terrible? What if another country has sovereign debt issues? What if?... What if?... What if?
The above paragraph underscores why the stock market is so tricky. Quite often when it's the hardest to be invested is exactly when the market makes its most dramatic upward moves. That fits in with the classic saying; "the market climbs a wall of worry". Indeed we have a wall of worry in front of us. So maybe we should take a deep breath and start climbing it together.
[Here's Steve from four months ago 2/10/10] This morning I read an interesting article about the Dows long term battle with the 10,000 level. Going back to 1999 we have crossed above and below that mark over fifty times. Another way to look at this struggle is to say the stock market has produced no gains for investors the past decade. That's not good.
So today we leap back above 10,000 again. Perhaps because the debt problems in Greece should soon be under control. Or perhaps just a relief rally. The interesting question is whether this is our last time crossing that important level? I hope so, but given the results the past ten years, its best to proceed with some caution.
[6/23/10] Stocks showed surprising weakness on Tuesday leading to our first close under the 200 day moving average in a week. Hopefully we see a bounce Wednesday to refute this bearish leg. Unfortunately if we don't, and the market closes under for a second straight session, then odds are we are in for more downside. No matter what the technical's say, I think it might be hard for the market to make significant headway from here without positive reinforcement from 2nd quarter earnings season which doesn't start until July 12th. Buckle up for a bumpy ride.
[6/24/10] Technically speaking, the market looks bad given a 2nd straight close under the 200 day moving averages.
Fundamentally speaking, I did not care for the change in the Fed's language today. They are no longer saying that the economy is "strengthening". Rather they said that the economic rebound is "proceeding". This may sound like semantics, but the Fed is VERY particular about their choice of words and this marks a clear change in their sentiment. To make matters worse they stated; "financial conditions have become less supportive of economic growth ... largely reflecting developments abroad (read: Europe)."
The smart money took this as a signal to move more cash to safety as can be seen by the further drop of the yield on 10 year treasuries to the lowest level since May 2009 (when it looked like the world was going to fall off a cliff). And perhaps many investors feel that is going to happen again.
So I am taking this as a sign to lighten up my long positions. I even added a hefty ETF short position into the mix. I believe it will be hard for the market to press higher until we get forward looking guidance from Corporate America that makes us feel better about the economy. That won't happen for another few weeks. That says to me that the market is more likely to head lower over the next few weeks.
[6/24/10] Thursday's market mess is not a shock given my earlier comments on the poor technical and fundamental picture. Add a mediocre jobs report and poor durable goods report into the mix and no wonder stocks tumbled. What's in store? It's possible for Dow 10,000 to act as support. However, I suspect that there is a magnetic pull towards the recent low around 9700. That's what I am planning on.
[6/28/10] In many ways, the market activity on Friday made no sense at all. Bond traders ran for cover and pushed down the yield on the 10 year Treasury to the lowest level since May 2009 (when the Dow was at 8000). Yet stock investors gobbled up riskier small caps with the Russell 2000 gaining 6X more than the S&P 500. Usually if there is a disagreement between stock and bond investors…it's the bond investors who prove to be correct. What they see is that the GDP got revised down again to +2.7% when it was originally at +3.2%. That simply is not the kind of robust reading you expect coming out of a deep recession. So the bond investors are willing to take a measly 3.1% return on their money as they feel it's better odds than being in the stock market. That, my friends, is a warning that should be heeded. I sure did by adding to my short positions mid day on Friday. If you haven't lightened up your stock holdings already, then you might want to do that now.
Certainly I don't want to come off as too much of an alarmist because history has shown time and time again that the economy is a tricky read…the stock market even trickier. So I fully realize that I could be 100% wrong on this call and am willing to become more bullish if that's what the tea leaves tell me. Right now they seem to be saying "weakness ahead".
[6/30/10 early a.m.] Looks like the "Flight to Safety" warnings sent by bond investors were finally heeded by stock investors today. And run for cover they did with the S&P 500 sinking by –3.1% to yet another close under 10,000. A plummeting Consumer Confidence report certainly sped up the decline.
The tough question at this stage is; Where is the bottom? Is it at 9700 like the last down leg? Is it at 9500 (given technical voodoo that some chartists are talking about)? Or do we make a much scarier dive to 9000…or worse??? I think there will be some support around 9500'ish. But not sure how much the market can go up til we get a good taste of earnings season starting in mid-July. Hopefully you folks are enjoying some protection from the short ETF positions that we've recommended in the recent past.
[7/2/10 a.m.] July picked up right where June left off…in the red. Leading the "Parade of Pain" was another disappointing Jobless Claims report followed by a clear downturn in the ISM Manufacturing Index. Markets tumbled as much as -2% before bouncing to a more modest decline. Friday brings the June Employment Situation report. Given the sad state of the ADP report and weekly Jobless Claims I would be shocked to see a positive outcome that the market would rally from. So I see more downside on the docket. We are getting close to Dow 9500 and S&P 1000 where there should be decent support. Once there I suspect a 3-5% relief rally will ensue. After that???…we'll figure it out as it comes our way.
[7/7/10 a.m.] If you were just to look at Tuesday's gains on the Dow or S&P 500 you might suspect that a rally took place. However, when you look below the surface you'll see some disturbing facts that point to more weakness. First, the small cap focused Russell 2000 index actually fell –1.47%. And then the rate on 10 Year Treasuries slipped even further to 2.93%. Both of those are clear statements that investors are afraid to take risks, which rarely bodes well for the stock market. So yes, there could a nice bounce starting any day now. Yet one has to question the longevity of that move and perhaps selling into that rally might be the best strategy.
[7/8/10 a.m.] As noted yesterday, the bounce could start at any time. So perhaps the +3% move on Wednesday was the start of a new bull run. Or perhaps it was the start and the end all in one day. Personally I will need a bit more proof to believe in this move before I undo my current defensive posture. Pulling back to the big picture there is still a fundamental battle raging on. The bulls are no longer talking about a V shaped recovery. They admit that growth will not be that robust, yet the recent market downturn more than accounts for any amount of slowing. So time to rally in their book. The bears think we are the next Greece about to implode. They expect many more pounds of flesh to be paid by US equity holders. So "take profits while you can" is their mantra. It will be several months before these arguments are settled. So expect volatility and lack of clarity to be the norm.
[7/9/10 a.m.] Thursday afternoon I started having a "slight" change of heart. I realized that given the recent correction that expectations are pretty low for earnings season which starts up next week. So it probably wouldn't take much good news for the market to rush to the underside of the 200 day moving average at Dow 10,360. So I took my foot of the brakes a bit and pocketed profits on some of my short positions. Even with that being said, I'm still finding it hard not to be somewhat defensive given the recent weak economic reports. Hopefully Corporate America has some better news starting next week and we can get more than just a temporary lift. If so, then the market should get above the 200 day moving average...and stay above for a while.
[7/19/10 a.m.] How did earnings reports fare on Friday? TERRIBLE. Look at the punishment dealt up to the four main reporters: GE – 4.6%, Citigroup – 6.3%, Google, - 7.0% and Bank of America – 9.2%. Now add in that the Consumer Sentiment report fell precipitously to the lowest level since August 2009. It would seem that a range is forming between Dow 9600 and 10,300. Unless there are some overwhelming surprises on the earnings front this week, then expect us to move toward the lower end of the range. Act accordingly.