Where does this rally go from here?
If youare trying to figure out where stocks are headed from here—and who with money in the U.S. stock market isn’t-you have to start with that number, the Friday, September 14, close for the Standard & Poor’s 500 Stock Index. (The index dropped to 1461.19 on Monday, September 17th, and to 1,459.32 on Tuesday, September 18th.)
The number won’t tell you where stocks will be in a week or a month or by the end of the year. But it does tell you how to think about the odds of the market moving higher from here or falling back. Here is why 1465.77 is important.
On June 1, 2012 the S&P 500 closed at 1278.04, the low for the year. If the index was near that level now, I would be willing to bet dollars to donuts that U.S. stocks would keep climbing.
On the other hand, even though the index is at highs not seen since the end of 2007, a correction isn’t a lock.
U.S. stocks have built up considerable momentum. With a falling dollar (thanks to the Federal Reserve’s announcement of a new round of quantitative easing), commodities have broken a downward trend that extended back to May 2011. The S&P 500, the Dow Jones Industrial Average, and the NASDAQ Composite have all broken above resistance on rising volume. The rising volume part of this is important since it says that investors are buying more stocks even as prices rise. That is good news for any rally.
In the short term, the course of the U.S. market will be determined by what investors and traders decide is the best way to make money for the rest of 2012 from the 1465.77 level.
Some traders and investors will decide that going short on a bet that U.S. stocks will fall from current high levels is the best move. For a lot of traders and hedge fund managers, that would be a continuation of a bet that has not paid off in 2012. These traders are doubling down on that strategy, hoping that it will pay off in the remainder of 2012. For these traders, the fact that the European Central Bank and the Federal Reserve have moved is a big plus. That clears the deck for traders to go short without fear of being blindsided by the world’s big central banks.
And some traders will decide to ride the momentum. If their performance is behind the indexes, they will be tempted to go riskier in an effort to make up ground by buying stocks with higher betas than the market as a whole. If they are ahead or even with the indexes, they will decide to keep on doing what has worked so well over the last few months and (a) buy stocks that bet on the U.S. housing recovery; (b) that will rise along with commodity prices if the dollar continues to fall; or (c) that will profit if the fall back-to-school and holiday retail season turns out to be as strong as is now projected.
The winning strategy for the rest of 2012 will depend on which of these two alternatives attracts more money.
And that in turn will depend on traders’ reading of indicators and events over the next few weeks. In December, I’ll bet that we will see lots of gurus intimating that the winning trend was inevitable or certain earlier in the quarter. But that simply will not be true. The current market can turn either way for the rest of the year—which makes it a tricky and risky market. And the way that it turns will depend on a news flow that is not predictable right now.
I think that the news flow over the next few weeks will seem positive enough to reinforce the market’s current upward momentum. But this certainly doesn’t make the continuation of the rally a sure thing. At the moment it looks like the best chance of making money lies in going with the momentum. But I wouldn’t pile on the risk in the U.S. part of my portfolio at this point. Long U.S. stocks, yes. Aggressively long U.S. stocks, no.
Here’s why I come out on that side of the U.S. market now.
- Growth in the U.S. stands a good chance of coming in above very low expectations. In the last week or so better than expected numbers on inventory levels, retail sales, auto sales, and home sales have led to very modest increases in growth projections from Wall Street economists. Granted the projections are extremely modest—expectations that growth in the third quarter would match the 1.7% annualized growth in the second quarter have yielded to projections of 1.8%, 1.9%, or maybe even 2.0%. But Wall Street is perfectly capable of talking itself into a belief, especially after the Fed’s announcement of QE3, that the economy’s growth rate is picking up significantly.
- Despite all the long-term, unsolved problems that still beset the EuroZone, the news flow there is likely to remain dominated by stories about falling bond yields in Italy and Spain, and progress toward getting the EuroZone’s permanent bailout fund, the European Stability Mechanism, into operation in the coming weeks. EuroZone leaders are about to deliver something that they’re really good at—a series of summits—in October and November that should keep the idea of progress toward a solution alive.
- A stronger euro on that belief in EuroZone progress means a weaker dollar means higher commodity prices. And higher commodity price will push up commodity stocks, which will give the U.S. market the upward leadership from oil, base metals (iron ore and copper) and gold that it needs.
- It looks like Brazil and China, the Big Two among developing economies, could finish the year on a strong note. In Brazil the government has cut its growth forecast for 2012, while at the same time projecting higher growth in the third and fourth quarters. (That seeming contradiction is actually a reflection of extremely weak growth in the first two quarters that has lowered likely growth for the year but left room for a second half performance that outshines the first half.) In China over the weekend government economists reported that China’s growth would pick up in the third and fourth quarter from the 7.6% growth rate in the second quarter. That would push China’s growth rate for 2012 to 7.7% to 7.8%, above the government’s goal of 7.5% growth. Again those numbers aren’t especially strong—for China—but they would represent a clear bottom in China’s growth above the level that many economists had feared. In other words, no hard landing for China.
If the market receives news like this, it’s enough—added to the stimulus from the Fed and the stabilization package announced by the European Central Bank—to keep this rally going into December.
Of course, the news could be significantly more negative than this. Enough negative surprises could validate the shorts and bears’ view of the market and produce a correction in coming months rather than an extension of the rally.
What could go wrong?
- The crisis in Greece—the Greek government has so far been unable to convince the inspectors from the Troika—the International Monetary Fund, the European Commission, and the European Central Bank—to authorize the next payment in the Greek bailout package. The Greek government says it can squeeze through until November, but a major part of the money was set to go to prop up Greek banks. A loss of confidence in the Greek banking system (or let’s say a further loss of confidence) could send this all out of control.
- Right now the markets seem to be assuming that after the U.S. election all the parties will sit down and work out a way to avoid sending the U.S. off the fiscal cliff in January when automatic budget cuts and the expiration of the Bush administration tax cuts could threaten to stall the economy. Politicians? Rational discussions? A compromise solution? How likely is that? If the elections in November embolden or weaken one party significantly, some one may start grandstanding in a way and on a schedule the
freaks the market out.
- Spain could wind up in chaos if the government of Mariano Rajoy keeps refusing to request a bond-buying program and the regional governments rise up and refuse to cut their debts.
- The October transition to a new set of leaders in Beijing could produce enough publicly visible infighting to rattle the Chinese and thus global financial markets.
I have probably missed a few pluses and minuses, but you get the thrust of my argument, I hope: the odds favor a continuation of this rally but not overwhelmingly so. You certainly want to give your portfolio a chance to participate in any upside, but I don’t think this is the time to pile on risk in the U.S. markets. Dividend paying stocks in general and in the energy field in particular look attractive. Sectors that would appreciate with good retail seasons, such as trucking, but that haven’t appreciated wildly look attractive. Sectors that might be able to score gains even if the general economy doesn’t turn in better than expected growth—such as housing—deserve a dollar or two.
A last reason to be cautious on U.S. stocks is the very real possibility that Chinese and other emerging market stocks could wind up outperforming U.S stocks if the global economy breaks as positively in the remainder of 2012 as it could. Chinese stocks are cheaper than U.S. stocks right now and are nowhere near a high. If traders go for the risk-on trade in the next few months because the U.S. economy looks stronger and the EuroZone looks more stable, Chinese stocks might reap a bigger benefit than do their U.S. counterparts.
Please note that nothing in this post or in these scenarios imagines that the market will rise on fundamentals. The best that I can find to say is that the rest of 2012 will look better than current very low expectations. I am talking sentiment and cash flows, not GDP growth and earnings.
And nothing in my scenario suggests that the global economy won’t have to pay the piper sometime down the road. We have witnessed a huge expansion of global credit and global money supply as central banks have struggled with the Great Recession. The global financial system still faces the challenge of coping with the reversal of those balance sheets and the turmoil that will come with a need to continue a deleveraging that has not progressed very far anywhere in the global economy outside the United States.
At some point, kicking the can down the road just will not be a viable solution.
Stock Market Forum
- Paw4mance Pet Products International Inc.(PAWP) Retooling to Grow in Existing Market
18 June 2013
- Live market free calls
18 June 2013
- IntelGenx (IGX.V) Reports Second Quarter 2012 Results and Highlights Recent Developme
18 June 2013
- Brent hovers near 10-week high, Fed meeting in focus
18 June 2013
- Commodity Trading Tips | Intrady tips | Lead Tips - Commdoitytips.com
18 June 2013
- How To Trade in Commodity Market
18 June 2013
- European shares lower on capital woes dragged by Danske Bank
18 June 2013
- Maruti Suzuki Alto 800 VXi Launched
18 June 2013
- 18/6/13 Intraday equity Free Tips Calls
18 June 2013
- Gold marks time as investors await stimulus outlook
17 June 2013