We officially touched Dow 12,000 on Wednesday before a mild retreat at day’s end. Helping the cause was President Obama’s “tack to the center” speech talking about business friendly initiatives to spark more job growth. Combine that with more quality earnings reports and the Fed keeping their foot on the QE gas pedal and you understand why we are marking new highs.
The trick at this point is how we get above this key level. If Q4 GDP on Friday is markedly above the 3.5% consensus, then we will blast right on through. If not, then we will flit above and below 12,000 a little while longer. What some might call a consolidation period. This will help us build up strength for a meaningful move above.
I know some of you traders may read the paragraph above and consider taking some profits at this stage if a consolidation period is in the offing. However, I warn you guys against getting too cute at this time trying to time the market as you don’t want too much money on the sidelines when this ship sets sail.
I also know that many people are concerned that the market is too high after a 20% rally from the lows of late August. Here is a quick rundown of the reasons the market can continue to press higher at this time without a meaningful correction:
- Corporate Earnings at Peak Levels: Early reports from Q4 earning season shows corporate America continuing to sparkle with most exceeding the consensus and giving higher guidance for the future.
- Valuation: Forward looking PE for S&P 500 still only at 13.5 with historical norms more like 14-15. Plus earnings yield still an attractive 7.3% versus half that for the 10 year bond.
- Bond Rally Over: The 30 year bond rally ended in mid October 2010. Some active investors already took notice moving money from bonds into stocks. More passive investors still haven’t fully woken up to this fact. When they see another quarterly portfolio statement or two showing more red in their bond funds they will catch wise. This will lead into more money flowing into the stock market.
- Individual Investors Not Fully on Board Yet: We’ve all heard about the investing psychology pendulum that shifts from fear to greed. The losses of 2008 and the volatility of 2009 and 2010 still has many individual investors on the sidelines. As they read more headlines of stocks making new highs and hear of more of their friends making money, then the pendulum will start moving back towards greed. This momentum phase of the rally has not yet begun. When it does, then stocks will race even higher than they are now.
Long story short, 12,000 is not going to be the peak of this bull rally. So it's best if you're plenty long the stock market now to enjoy more gains in the months ahead.
This is where I share 5 of my favorite stocks that all have a coveted Zacks Rank of 1 (Strong Buys)
- ADTRAN (NASDAQ:ADTN): Nice earnings beat this quarter has analysts moving estimates significantly higher for 2011. Note that they have averaged an 18% surprise the last 4 quarters. So probably there is more good news in store for investors.
- Bed Bath & Beyond (NASDAQ:BBBY): 2010 was a nice year of growth for this retailer. Now imagine how well they will do as the employment picture starts to improve and the consumer starts flexing their muscles.
- Fairchild Semiconductor (NASDAQ:FCS): One thing is clear this earnings season…tech is alive and kicking. This bodes well for most players in the semiconductor field and FCS is seeing their fair share of this growth.
- Halliburton (NYSE:HAL): With oil prices pressing new highs, it’s not surprising that oil drilling is on the rise. HAL is a direct winner on this front as can be seen by their fresh earnings beat which will have more money flowing into shares.
- Korn/Ferry (NYSE:KFY): This leading executive recruitment firm was already seeing improved business growth in 2010. Analysts see that growth accelerating in the future as the US employment picture brightens.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.