Wow, the market stopped going straight down. I recently wrote in my outlook for this week that the market would likely stabilize this week, citing the fact that all indications are the U.S. economy will not likely reenter a recession, European stocks were trading at these low levels since the summer of last year, and the strong recent performance of one of the market's weakest sector over the last month, energy.
While all traders have good calls and bad ones, this call was prescient. The question now is: What's next?
I think the rally in the S&P 500 and its tracking exchange traded fund, SPY (SPY), will continue for at least the next couple weeks, for several reasons.
First, the U.S. economy is not reentering a recession. While many cyclical sectors such as energy and the industrials saw market leading names in these sectors such as Caterpillar (CAT) and Schlumberger (SLB) sell-off over 20%, the U.S. economy continues to expand at 2-2.5% a year. Also, despite the very poor recent jobs data, recent major reports from the U.S.'s leading banks, Citigroup (C) and JP Morgan (JPM), showed a continued expansion in debit card and credit card transactions, and housing prices have fallen very little over the last several months as well.
Second, the dollar appears to be peaking. While the economic data coming from the eurozone has been weak, and fears over further possible European defaults remains high, the Fed is likely to take additional action if the U.S. jobs market continues to deteriorate.
While dollar has risen to the 82-84 level, the dollar never rose past 89 at the height of the credit crisis in 2008, and the dollar is trading at just a couple points of its summer of 2011 high before the European initiated operation long-term refinance. Technically, the dollar has significant resistance at the 82-84 level, and around $22.50-23 in one of the dollar's tracking exchange traded funds, the UUP (UUP). With commodities such as oil down nearly 30% in the last several months, a stabilizing dollar will likely cause commodities to rise in the coming months.
The third reason I think the market will continue to rally is because of rebalancing. While the S&P 500 and its tracking exchange traded fund are off around 10%, cyclical sectors such as energy and the financials have sold off over 20% in the last several months. Leading industrial names such as GE (GE) and Caterpillar are off over 15%, and even market leaders in the technology sector, such as Microsoft (MSFT) and Apple (AAPL), have sold-off nearly 15% from these stock's earlier year highs.
To conclude, while the economic data remains poor, the U.S. economy shows no signs of reentering a recession. With many leading cyclical companies, such as Exxon-Mobil (XOM) and GE paying out nearly twice in dividends what the 10 year is yielding, and the TIPS market pricing in zero inflation over the next year, now is likely a good time to rotate capital into more cyclical sectors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.