Anyone who has been around Wall Street long enough has probably noticed a number of bullish signs propelling the S&P toward a new 12-month high.
The first sign is a wave of job cuts at large firms: 11,000 at Citigroup (C), 5,400 at American Express (AXP), 1,600 at Morgan Stanley (MS), and 290 at Campbell Soup (CPB) -- to mention but a few. Job cuts are certainly bad news for Main Street, but they are bullish for Wall Street as they add big to the bottom line. They further allow companies to recruit new talent as they replace unprofitable with profitable product lines.
The second sign is dividend hikes: 100% at Ford (F), 12% at General Electric (GE), 10% at Boeing (BA), and 7% at Intel. Dividend boosts are usually an indicator of improving financial situations at companies and make their stocks more appealing to investors, especially in this low environment.
The third sign is bidding wars for takeover plays, as has been the case with companies such as Sprint Nextel (S), Dish Network, Clearwire Corporation (CLWR), and Knight Capital. Bidding wars are usually bullish for Wall Street as they push market valuations higher.
The fourth sign is a stabilization of European economies and a rebound in the Chinese economy -- a positive development for commodity and materials companies that sell a big chunk of their output to China.
The fifth sign is liquidity. Record low short-term and long-term rates leave Wall Street as the sole haven for superior returns, as confirmed by the record inflow of funds into equity funds.
But there is a bearish sign to be noticed: investor complacency over the ability of policy makers to come to the rescue should the economy weaken. The trouble, however, is that monetary and fiscal policies are maxed out from previous rounds of easing, so there is very little (if any) policymakers can do to help the economy grow. Another round of QE, for instance, may cause another commodity price spikes and depress consumer spending, while an additional debt-financed fiscal stimulus could cause a spike in interest rates. Besides, the last time investors placed too much faith in policymakers was in early 2008 -- that's when markets peaked.
How should investors position their portfolios to capitalize on the upside bias on Wall Street?
First, accumulate the shares of major financial companies -- that's where the major job cuts are concentrated. The problem, however, is that most of these banks had a big run-up in recent months. This means that they should be purchased on pullbacks rather than chased after.
Second, accumulate dividend-paying stocks that underwent a correction in the last month.
Fourth, trim positions in U.S. Treasuries. Money that goes into stocks must come from somewhere -- money market funds and U.S. Treasuries.
Fifth, buy portfolio insurance, which is very inexpensive at this point. The VIX is trading at record low levels.