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You could say the market made two big steps forward in September and October. And now we are taking a step back in November.,
So let the double dippers and doomsayers beat their chests for a while. They need an ego boost after being so wrong, for so long.
The simple fact remains that the economy is getting healthier and corporate earnings are on the rise. Those are the two greatest predictors of future share price performance. And both are singing in unison that there are more gains ahead.
On Friday the cause for the step back was that foreign markets, especially China, were down overnight tugging us down with them. Plus there is a lot of talk that the entire reason for the recent stock market rally was that QE2 devalued the dollar which raised asset prices like commodities and stock. And now that trade may be over and people think the market will come down with commodity prices now potentially headed lower. I don’t think that argument holds up under scrutiny.
A lower dollar creates inflation because it also creates higher cost of goods (especially commodities). There is no net gain for the US economy since we will just pay more for stuff like oil, lumber, coal, copper etc. So how is that good for the economy and a reason to rise? And if dollar devaluation and inflation was a good tonic for an economy, then Zimbabwe would now be the world’s largest economy. (Sorry for the obscure joke. Here is a Wikipedia page that explains it: Hyperinflation in Zimbabwe)
History has proven that a strong economy begets a strong dollar begets a strong stock market. Soon enough this weak dollar/strong market correlation will decouple and investors will realize the market goes higher because of the “begetting” relationships noted above.
As for this recent stock shake out, I wouldn’t be surprised to see us test Dow 11,000 before getting a bounce. Maybe 10,920 at the worst, where we have support from the 50 day moving average. That would be a healthy correction that gives us plenty of time for a traditional holiday rally to wind up the year further in the plus column. (For more insight on the fundamental case for the stock market at this time, then check out my recent article; 4 Reasons Why Stocks Are Ready to Make New Highs)
Take 5
Here is where I share 5 of my favorite stocks that all have a coveted Zacks Rank of 1 (Strong Buys):

1) Autoliv (NYSE:ALV): After a couple years in the tank, the auto industry is coming back with a vengeance. ALV has fully participated in this rally and earnings trends show more room for upside.
2) Baidu (NASDAQ:BIDU): Everyone understands the growth potential of this stock. However, it just seems to keep going up and no chance to grab up some shares. Perhaps this recent dip will give investors one more chance.
3) Caterpillar (NYSE:CAT): The long term trends for their equipment is amongst the best of any group. But let’s be honest here. Shares got ahead of themselves on this recent dollar decline rally. So let CAT cool off and then load up for the long haul ride which seems very attractive.
4) InterActiveCorp (NASDAQ:IACI): Rebounding world economy = rebounding advertising market which is good news for this leading website owner. Throw in a strong earnings surprise this quarter and $13 in cash per share and you can appreciate the upside potential.
5) Steven Madden (NASDAQ:SHOO): Retail analysts are starting to roll out their predictions for Holiday Shopping winners and losers. So far the trends are looking very favorable for the shoe/boot category and Madden is expected to be a prime beneficiary once again.


Disclosure: I own shares of IACI and SHOO
Source: Two Steps Forward, One Step Back for Markets - And Five Stocks to Buy