6 Reasons to Believe in a Market Recovery

 |  Includes: DIA, QQQ, SPY
by: Jason Schwarz

What a difference a week makes.

One week ago, the stock market had some legitimate concerns. This week has resolved a number of them.

(1) Who will be running the Federal Reserve? Ben Bernanke is back, so this clears up the uncertainty of future rate hikes. We all know that Bernanke will be very slow to raise rates and will do nothing to jeopardize the recovery. As a student of the Great Depression, Bernanke understands the risks of counting your economic chickens before they hatch.

(2) Last week it appeared that President Obama was ready to go to war against the banks. Between the TARP tax and the proposed regulation, he had distanced himself from the policies of Treasury Secretary Tim Geithner and had joined the bandwagon of Paul Volcker. This created quite a bit of uncertainty for the market. After the difficult health care defeat, it is important for Obama to rebuild political capital with voters and the easiest way is by fighting unemployment. The administration would be risking this year’s elections if they got into a long and grueling battle against Wall Street. I still think Obama will push for reform but odds are it won’t make it through Congress in an election year.

(3) Last week we were still on alert about health care reform. This week it looks like we can count on gridlock to maintain the status quo.

(4) Last week we were concerned that expectations for earnings season were too high. It was under this thesis, along with the banking uncertainty, that the shorts found their conviction to begin the attack back on January 20th. Corporate America is showing a disconnect with the selloff as they prove with each report that conditions are better than we thought. JPMorgan (NYSE:JPM), Intel (NASDAQ:INTC), Apple (NASDAQ:AAPL), IBM (NYSE:IBM), Google (NASDAQ:GOOG), Ford (NYSE:F), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT)... have all thrashed the already high expectations. The fundamentals for this economy look ripe for continued success.

(5) Apple single handedly moves markets as it did this morning. With the Dow up over 100 points because of the GDP surprise, we saw heavy selling in Apple that took advantage of the lingering vulnerability of the past two weeks and the whole market followed suit. Last week Apple investors were uncertain regarding when the company would implement its new accounting method, about earnings and about the expected $999 price tag for the iPad. Apple delivered better than expected news on all three. The new accounting is now in place so Apple can finally trade at its real p/e, earnings showed that revenue is up 32%, profits are up 49.6%, Mac sales are up 33%, iPhone sales are up 100%, and gross margins topped 40%. The iPad event was a success because of one main reason: the $499 price tag. At that price point, the iPad is poised to be the hit product for the 2010 holiday season.

(6) Q4 GDP came in above expectations at 5.7%. I think we can all learn to get used to this ‘new normal.’ We have so far to go in this macroeconomic cycle of improvement off the panic lows of 2009 that there is no reason not to believe in continued expansion. Banks no longer operate under the short term threat of mark-to-market capital failure and inventory rebuilds will begin to push jobs growth and economic growth over the next two years. The fact that the dollar continues to come off its nine year lows is another great signal for the U.S. economy. We don't want a high dollar but we don't want a rock bottom dollar either.

Generally speaking, macroeconomic cycles last for 3 years and bull market corrections last 30-60 days. Is the negative stock market performance of the last two weeks indicative of a new downward cycle or is it indicative of a short term correction? This week gave investors increased clarity to the question. So suck it up, adjust your portfolio to take advantage of new opportunities, and patiently wait for the correction to end.

In The Alpha Hunter, we discuss the virtue of investor patience; in some conditions it can be a virtue but in others it can be a sin. Stage two of the stock market recovery looks primed to be a virtuous rise back to Dow 13,000-14,000. It will take a dramatic string of events to reverse course; what seemed potentially dramatic last week has been significantly watered down.

Disclosure: long AAPL