Ahh, the sweet smell of money, isn’t it a nice after so many months of losses? Despite the continuing predictions of a pullback, the markets continue to forge ahead for yet another week with all three averages up over one percent. Although the S&P 500 only gained 17 points for the week, the S&P500 is now up over 27% from the beginning. Today the Dow breached 8,000 for the first time since early February. And I believe we have more upside to come.
Admittedly, in last week’s column I had been hoping for more of a pullback than the 27 points we lost over Monday and Tuesday. But I’ll take what the market gives. Now it appears the Dow, S&P and NASDAQ want to move higher. My target on the S&P 500 index is 900 from today’s close of 856. This week, although financials continued to run, it was encouraging that technology, consumer and the materials sectors also moved higher.
The markets were heartened on Thursday by welcome news from Wells Fargo. The West Coast-based bank reported first quarter profits that were double Wall Street’s expectations. The company pointed to a sudden increase in mortgage applications spurred by record low interest rates and the government’s first time homebuyer tax credit as the main driver of profits. Given that much of the business was coming from what investors perceive to be a deeply depressed market, California, it raised hopes that the housing markets may have bottomed.
Adding to the good cheer was a New York Time’s story that indicated all but a few of the nation’s banks undergoing the U.S. Treasury’s “stress test” appear to be passing with flying colors. Bank examiners do warn however that some of the larger banks may need more bail-out money.
As if that wasn’t enough good news for this battered sector, the Securities and Exchange Commission (SEC) closed a number of loopholes that will make it more difficult to short stocks (such as the financials) that have already declined substantially in price. They also made it more difficult to “short naked” which means sell stocks one does not own or can’t borrow. The net result of all this wonderful news re-ignited the rally in financial stocks.
Readers may recall that less than a week ago investors were concerned that bank’s earnings, due to be announced next week, would hold some ugly surprises. But heck, that was last week and now the sky is the limit with the financial sector up over 9% on Thursday alone. As more and more investors begin to chase stocks, greed begins to take over. I had several phone calls from clients this week who were afraid of “missing out” on this bull market run. Many of them were the same investors who called in a panic at the bottom of the markets demanding I sell everything.
Those who have been reading my columns and following my advice have made money in this run. Given that I started writing about a bounce of 26% or more back in early March, it is somewhat surprising that now that most of the move is over I am getting these calls. Bonds and income funds have performed quite well in this move up. Granted, they have not matched the returns of the stock market but neither have those investments lost nearly as much since the beginning of the year. Many professionals have been going along with this ride up in sectors and stocks despite their misgivings. Others have been worried that they would be caught in a bear trap if they invested since previous bounces have ended in disappointment. Those concerns may be true but in the meantime stocks are climbing this wall of worry and disbelief. I have written many times that these days only buy and sell strategies work. I continue to believe that and I hope you do too.
It is too early to declare the bottom is in and a new bull market has begun as many forecasters are saying. I’ll take the far more cautious approach. If you want to add money into this market buy conservatively, dollar cost average and be prepared to take your lumps if the markets suddenly heads south without warning. In the meantime, I’ll stick with my forecast: a gain of another 50 points plus or minus on the S&P. At that point, I’ll re-evaluate, so stay tuned.