Well, we’ve made it through another pullback together. It seems clear to me that this week’s stock market action is telling us that the worst is over—for now.
Yes, there are still a few dark clouds on the horizon. The closest one is the on-going debate over increasing the nation’s debt limit. Although I believe that in the end politicians will do the responsible thing and approve an increase, they are not beyond eleventh hour posturing. Few politicians can resist the chance to become the focus of the nation’s attention by withholding their vote until all seems lost, only to relent at the last moment, thereby becoming our heroes. Disgusting? Yes, but that’s what America’s politics are all about these days.
As a result, expect continued volatility within the markets as the deadline approaches. The Obama Administration claims we will run out the clock by July 22nd while the Treasury is sticking with August 2nd. The time it would take the Congress and Senate to ratify the debt increase accounts for the difference.
But the bias of the market, despite the volatility, will be toward the upside. It appears that investors are beginning to recognize all the positive factors that I have outlined over the past two months. Japan’s economy, for example, is roaring back as indicated by very strong industrial production data this week. For readers who missed it, see my June 2 column “Japan, is the sun beginning to rise” in which I both recommended Japan and predicted its rebirth. As it occurs, U.S. economic data will also start to strengthen. This Friday’s manufacturing data, released by the Institute for Supply Management (ISM), is just a taste of what’s to come. It showed the economy gaining strength for the first time in four months. Oh, and expect unemployment numbers to start dropping as well.
As you know, I have been arguing that the U.S. was in a soft patch of growth brought on by Japans’ earthquake related slowdown. Now that Japan is revving up, so will we. With Greece’s problems resolved (at least until September) and oil prices heading toward $85/BBL, Wall Street is finally waking up to what you and I have known for weeks.
Normally, after such a massive move, the markets should pull back to about the breakout level, which would be 1,300 on the S&P. It doesn’t have to happen, but if it does, consider it a buying opportunity. For those of you who may have gotten cold feet during the tumultuous times of the recent past, that would be your chance to get back in.
As for the end of QE II, (see yesterday’s column “The end of QE II”), all of the hyperbole you have been hearing about how interest rates would spike and the markets plunge did not materialize, nor will it. As I predicted, the demise of the Fed’s quantitative easing program is a non-event. With all these negatives removed from the market simultaneously, I expect stocks to roar. My price target for the S&P 500 remains at 1,450 or higher.
Once we get there, well, that may usher in a horse of a different color but first things first, the markets are going higher so enjoy your gains.