Since Fed chairman Ben Bernanke implied at a speech in Jackson Hole, Wyoming on August 27 a second quantitative easing (QE2) program was afoot, the market has rallied 20% over the last ten months.
Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus …. A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve's holdings of longer-term securities.
June 30 marked the end of a $600 billion bond-buying program by the Federal Reserve. The QE2 program had little effect on the country's employment position, but the market's QE2 rally rose to rival multi-year heights by the end of the first quarter this year. The Dow was up 28%, the S&P 500 flew 30% and the Nasdaq has climbed 36% over the last 10 months. The leaders for each respective exchange were as follows:
- Caterpillar (NYSE:CAT) 61.6%
- Alcoa (NYSE:AA) 58.00%
- IBM (NYSE:IBM) 38.9%
- Chevron (NYSE:CVX) 38.1%
- Exxon Mobil (NYSE:XOM) 37.2%
- Cabot Oil & Gas (NYSE:COG) 101%
- CBS (NYSE:CBS) 111.2%
- Netflix (NASDAQ:NFLX) 110.5%
- National Oilwell Varco (NYSE:NOV) 106.1%
- Chipotle Mexican Grill (NYSE:CMG) 105.1%
- Netflix 110.5%
- Biogen (NASDAQ:BIIB) 102.2
- Altera (NASDAQ:ALTR) 82.4%
- Baidu (NASDAQ:BIDU) 79.6%
- Whole Foods Market (NASDAQ:WFM) 77.5%
The market’s roaring rally since Bernanke’s Jackson Hole speech was sudden and expansive. All S&P 500 sectors have posted significant gains. What’s more, only three Dow 30 stocks, 28 S&P 500 components, and eight Nasdaq 100 concerns were down during the rally. With industrial development stammering the past few months, a withdrawal from the April highs has transpired. Even so, the majority of markets are up over 20%. The question is: What happens now that QE2 is over? The Fed has given no hint of a possible QE3 program.
Current Market State
CNBC’s European Closing Bell’s anchor Lousia Bojesen co-anchored with Nicole Lapin of the Worldwide Exchange a very informative segment called the QE2 Debate, in which I was fortunate enough to add my two cents. The bottom line is the end of QE2 is priced in and a majority of QE2 benefits have yet to reveal themselves, based on the fact most of the cash is sitting in bank coffers. I believe once the banks start loosening the purse strings, the market will rally. Last week’s market performance was the best for the year. My suspicions of more upside were validated by the outstanding CNBC Fast Money team.
The VIXM (NYSEARCA:VIXM) confirms investors are not scrambling to cover. In other words, money managers are growing more optimistic, which suggests the S&P has more upside.
After the rout in softs, I’m concerned about the agriculture trade. I sold out of Darling (NYSE:DAR). I’m not in the agriculture trade at all.
Terranova went on to say regarding the equity market's future:
Rotation will drive the S&P. I expect to see money come out of Treasuries and into stocks. As we enter the new quarter portfolio managers are on the edge of their seats, because they’re under-invested in equities.
I agree with Terranova. The writing is on the wall. Time will tell if the bulls or bears will prevail; nevertheless, I rest easy knowing I’m on the same side as these interminable redwoods of the trading forest. Guy Adami is, to some degree, cautious and stated: "If you’ve missed the rally, I’d be hard pressed to go piling in on Friday, I think the market sells off to 1300, but if/when that happens I'd take another look.” Adami advocates acquiring Trina Solar (NYSE:TSL), while Najarian recommends Corning (NYSE:GLW), noting unusual options activity for the past three days.
I highlighted Corning’s potential upside in a piece published on June 23. Terranova's Ford pick was underpinned by FX Educator's Ed Ponsi on the most recent Street Signs "Trading Twitter" segment anchored by Mandy Drury. Moreover, some of the stocks that did well for the last three quarters should continue to prosper. Of the past leaders, my favorites are Caterpillar, Netflix, Alcoa, and Exxon, although, with the recent unfortunate spill, I would hold for a for a better entry point regarding Exxon.
With the Greek debt crisis resolved near term, the commodities bubble bursting, gas prices dropping, and Japanese factory output soaring, these names should find their footing and be off to the races. Based on the current market conditions, I would suggest scaling in to any position to reduce risk. I believe the stocks suggested currently provide significant opportunities for long term investors.
Disclosure: I am long F.