Insights & Advice

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The Coast is clear

The stock market continues to be buffeted by bad news. Energy prices are climbing, war rages in Libya, Japan’s nuclear crisis continues to radiate and Portugal’s government resigned after failing to push through austerity measures intended to avert a financial crisis. The stock market simply shrugs it off and moves higher.

No storms in sight

Pay attention readers. When markets continue to absorb negative news, the tea leaves tell me stocks are going higher. Last week I wondered if the correction was over. The answer is yes. Some arcane variables I follow are flashing green. For example, market breath (the number of advancing stocks versus decliners) has made a sharp reversal over the last ten days, which is a good sign. In addition, the percentage of stocks that are now above their 50 day moving average stands at 57%. If history is any guide that indicates we will enjoy a strong multi-month rally.

“But how can the very same worries that sank the market as recently as a week ago now no longer matter,?” protested a Snow Bird with a summer house in Becket, who was convinced the world was coming to an end just a few days ago.

Markets tend to discount bad news and price in numerous “what if” scenarios over time. The European banking crisis has been with us for well over a year, so Portugal’s problems no longer have the power to ratchet up risk on a worldwide basis. It would take serious financial problems in a really large country such as Italy or Spain to roil world markets down the road.

In the Middle East, the protests in Tunisia began in December of last year. Four months later, investors, who initially feared this unrest might spread to Saudi Arabia, now believe that if it were going to happen, it would have done so by now. Sure, oil will still remain at the $100-$110/BBL. level until hostilities in Libya subside, but the rest of the market is already focusing on other things.

Finally, Japan, the world’s most recent crisis, is far from over, but the inflated fears of a nuclear holocaust that drove the markets lower two weeks ago have been punctured leaving a mess (see this week’s column “Who Pays for Japan”) but not one that will sink the world’s markets. And in the meantime, U.S. GDP was revised upward for the last quarter of 2010 to 3.1%. Interest rates remain at historically low levels, and the economy appears to be gaining strength.

What we have had is a good old correction. Now it is over. Valuations are considerably lower (on average 7%) which has reduced the premiums in the equity market to a reasonable level. I believe the markets are poised to move substantially higher from here as I have written several times in the past. It appears the same cast of characters—materials, food, technology, industrials and energy—will lead the markets higher. Invest accordingly.

Posted in A Few Dollars More, At the Market