Through most of this rally, the stock market (NYSEARCA:SPY) has been embracing the good news and justifying the bad ones. Positive economic news is seen as bullish and negative news has been recalibrated by investors as positive, since they "ensure" that the FOMC monetary policy will remain in an "easing state" for a longer period of time.
YoY GDP Growth Rate: "I fell from 2.4% to 1.8% in the 1st Qtr"
Stock Market: "Whatever"
YoY Unemployment Rate: "I'm down from 8.2% to 7.6% in May"
Stock Market: "Yes! Please keep going down, but s l o w l y"
YoY Retail Sales Growth: "I fell from 5.6% to 3.6% in April"
Stock Market: "I don't care, talk to the hand"
YoY Consumer Spending: "I went up in the 1st Quarter!"
Stock Market: "Party like it's 1999!"
YoY Industrial Production Growth: "I fell from 5.2% to 1.9% in April"
Stock Market: "Well... More QE for me!"
Usually, when inflation declines significantly below target, equities tend to correct. The deflationary period that has been running rampant since February has been impressive, as reflected by the recent CPI readings: 1.98% in February, 1.47% in March and 1.06% in April. Inflation expectations as reflected by industrial production, bond ratios, currency and commodities point to deflation. Meanwhile, the stock market continued its way up, since lower inflation increases the probability of QE going uninterrupted.
But the economy is not the only one sending mixed signals, the Fed is now leading that department, and that's a game changer because, even though the economy has been sending mixed signals, the reality is that the leading economic index is still in an uptrend since 2012's summer. So the economic forecast doesn't look as gloomy as some estimate. But the possibility of the Fed reducing its bond buying program in a current deflationary trend creates real concern for investors. For now, most investors are calling the bluff on the confusing language (count me on that boat). The market rebounded around the nice psychological 1,600 number on the S&P 500 with some technical indicators reaching impressive (believe it or not) oversold levels and some positive unemployment numbers to use as an excuse.
We are navigating waters of uncertainty and confusion now. What if I buy stocks now and a couple of months later Bernanke pulls the rug from under my feet? Or what if I don't buy now and decide to wait, and the S&P goes to 1,800? Those are mainly the questions in the back of investor's heads. If the Fed didn't want the market to keep going too much ahead of the economy, that dizzying language strategy may work, but the price to pay may be increased volatility and business planning uncertainty.
Given that many fundamental, intermarket and technical conditions still favor the uptrend in equities, and given deflationary forces are being seen as QE tapering deterrents, the "buy on dips and hold" strategy is still working. Some key factors to consider are that:
- Market valuation based on the Wilshire 5000 vs GNP ratio is about 103% (non full-cap), which can still go significantly higher.
- Unemployment is slowly decreasing and the trend is consistent, along with a long term improvement of initial claims and non-farm payrolls.
- Factory orders usually go down in the summer season, but 2013 first quarter numbers were better than 2012 first quarter results.
- The massive spike in the yield curve that started in May is very bullish.
- The Libor/T-Bill spread trend is looking less stressful recently.
- Corporate bonds mechanics are still showing a risk-on mood.
- Cyclicals are overperforming consumer staples.
- Higher-beta stocks are overperforming defensive and high-yield stocks.
- Some technical indicators showing no froth and significant headspace to cover on the way up.
- Buyback announcements are likely to continue as well as rate cuts and market operations by central banks around the world.
The market seems to be getting ahead of the FOMC June meeting already, going up about 45 points in just 2 trading days (as of June 7).
In the end, Bernanke has the last word. His decision will determine the next big direction for the market. We can only speculate what will be the decision on June or in coming months. For now, based on inflation and unemployment rates, it looks like the current $85 billion per month schedule may continue.
Buying or not buying equities at this point will depend heavily on how much each investor believes that the Fed program will be unaltered for a considerable period.
9 Stocks that I am Watching
The first 8 stocks have good fundamentals. The last 1 is a speculative bet. I take advantage of technical extremes on the buy side when the market offers a window. I am proceeding with caution and initial positions are small.
- Apple (NASDAQ:AAPL) technically looks like it's getting prepared for a sprint in any direction soon, as the Bollinger bands compress more and more. I like the massive buyback plan to take advantage of current share price and I like the possible iPhone trade-in initiative. No position yet.
- TGC Industries (NASDAQ:TGE) is a seismic imaging company that looks ready for free cash flow growth on the long term. I am long.
- Cameron International (NYSE:CAM) is one of the leaders in the oil and gas services industry and its growth numbers look very good. I recently initiated a position as I did with TGC Industries.
- Japan Ishares (NYSEARCA:EWJ) is one of my favorites right now for the simple reason that the Japanese QE is the freshest and biggest QE in town. As long as the Japanese bond market doesn't go into real "panic mode", there is a lot of upside in that market. I am long since the recent dip.
- Noble Energy (NYSE:NBL) looks to me like a company that has efficiently executed their projects, especially in the Mediterranean Sea. The time from discovery to production in the Tamar field was impressive. The Leviathan field discovery (about 18 trillion cubic feet of nat gas) is simply gigantic as the name implies. Although I usually prefer companies with a higher percentage of oil and liquid-rich reserves versus nat gas, the company is efficient and I like the numbers to say the least. No position.
- Wal-Mart (NYSE:WMT) just recently announced an increase to their buyback program and something that I really liked: they want to "beef up" their online sales and want to use their existing stores as distribution warehouses. No position.
- Insteel Industries (NASDAQ:IIIN) has been increasing their margins by benefiting from lower raw material prices. No position.
- American Vanguard (NYSE:AVD) is a name I like in the agricultural business. No position.
- Thompson Creek Metals (TC) is a risky junior miner that I believe can soar later this year based on future copper and gold revenues. The company is in a very tight spot right now with moly prices falling. Striping was temporarily suspended on the TC mine to reduce costs. The situation can get worse, as the gold price goes down; and as I've said earlier, deflation without systemic risk is poison for gold. Mario Draghi and the Outright Monetary Transactions (OMT's) killed the fuel for gold in 2012. If fear or inflation return, then gold has a shot. But feasibility studies for Mt. Milligan were performed using a much lower price for gold and copper. Meanwhile, copper prices have stabilized a little lately, due to the Grasberg mine collapse, one of the largest copper producers in the world. I am long.
Disclosure: I am long TGE, CAM, TC, EWJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Any content in this article should not be considered as a recommendation or investment advice given that financial objectives and individual needs of the end user have not been evaluated. Suggestions or tips are for information purposes only and there is no guarantee on stock returns or market performance. All readers must use their prudence and consult their financial advisors before acting on any of the securities or suggestions mentioned or engaging into any other high risk investment. I do not hold any responsibility and can not be held liable for any losses incurred (if any) by acting on the information provided.