It would appear that November’s pull back in the stock market is over. From top to bottom the S&P 500 Index lost 4.5% and regained 3% of that in just the last two days. That feels to me like a break out.
Having gone from oversold to overbought in less than one week, I would suspect that a small dip in the averages is warranted, but that would only be an opportunity to buy in my opinion. Last week, I advised investors not to be too worried about last week’s sell-off. I had a hunch that new data would indicate that the economy is improving. That turned out to be the case. I expect a continued stream of better news on the economy over the next few months that will surpass most investor’s expectations.
In my last column I wrote that “the only possible fly in the ointment I see right now is the failure of congress to act on the looming expiration of the Bush tax cuts.” I implored readers to put their legislators on notice that the tax cut extensions were their number one priority. Washington must have been reading my columns because on Monday morning both parties met and began working on that extension. With luck, it looks like a compromise could be reached before Christmas.
At the same time, the President’s deficit reduction team presented a variety of far-reaching ideas to cut the deficit (see yesterday’s column “And now for that Deficit”). Between those developments stateside, plus the potential bail-out of Ireland, as well as some strong industrial production numbers from China set us up for a rally.
Although we have yet to break above April’s highs in the S&P 500 Index, over on the NASDAQ we have breached that barrier, as has the Dow. The consumer discretionary, industrial, energy and materials sectors have all broken out to bull market highs as well this week. These sectors all appear to be in a solid uptrend, despite looking a bit extended on a short term basis. Financials continue to move sideways as do some of the more defensive sectors such as utilities, healthcare, consumer stables and telecom.
Bullish sentiment has also been rising but is still below 50%, although next week’s figure from the American Association of Individual Investors may show a bigger increase after this recent rally. As a contrarian indicator, bullish sentiment is not yet at worrisome levels.
Remember too that the bulls have the wind at their backs. The economy is growing, (despite the high unemployment rate) as businesses begin to invest in plant and equipment. Although the housing market is bumping along the bottom, it is at least stabilizing, and exports are growing thanks to the weakening dollar. Finally remember that Fed. Chairman Ben Bernanke is on record in wanting stock prices higher (see “Don’t Fight the Fed”). All in all, that is a powerful combination that should drive the markets higher. How high?
On the S&P 500 Index 1,300 is a good round number. That’s a potential gain that might even entice some of those investors sitting in bonds to come out and play in the equity markets. As for where I see the most potential gains: emerging markets, mines and metals, energy, technology and possibly real estate are my bets.