WHY I’M BULLISH ON THE STOCK MARKET FOR THE NEXT 6 MONTHS
Despite all the doom and gloom headlines in the media, all is not lost in our economy and there are several reasons to be bullish on the stock market for the near-term. At the end of the year, I believe the major exchanges in North America will be higher than where they currently sit. Certain sectors will outperform others, specifically commodities (over the longer-term especially), but the stars have aligned for a broad stock market rally.
We notified all of you a couple weeks ago that the second half of the year would be strong; and, since that report was released, every major exchange in North America is up.
In this report, I’m going to touch on all the issues that will help aide this stock market rally and why I remain heavily vested in this market.
Before I get started, I want to state that I do believe America’s debt ceiling issue will soon be solved for the short-term. The only reason it has dragged on the way it has is because 2012 is an election year and both parties want to make the other look as bad as they possibly can. It’s a complete joke and it’s scary to think that these ‘leaders of America’ are walking out on each other during negotiations, not picking up each other’s phone calls and pointing fingers at one another when the cameras are on them. Until they get their act together, expect more market volatility as a result of their inability to get things done in a timely manner. With that stated, the debt ceiling issue will soon be dealt with and once that happens, the markets will continue rallying for the reasons I’m about to outline.
Reasons to Be Bullish For the Remainder of 2011
Companies Are Holding Record Levels of Cash
American corporations’ cash and liquid assets hit $1.9 trillion by the end of 2010. It is estimated to be as high as $3 trillion now. $1.9 trillion represents 7% of their entire assets, which is the highest it has been since the early 1960’s.
The record cash levels is viewed to be a precursor to new hirings, longer working hours, overtime pay and acquisitions. All these factors are extremely bullish for the economy and stock market. When confidence in the fiscal status of the US is restored (albeit temporarily), this will loosen company purse strings and they won’t be so hesitant to open that new division or acquire that rival up-and-coming firm.
One example of the glut in corporate cash levels is Apple. According to the Mac Observer “Apple has more than US$76.2 billion in cash as of the June quarter, and The Wall Street Journal reported on Wednesday that this was more than the gross domestic product (NYSEMKT:GDP) of 128 countries, according to data from the World Bank that we verified.”
Seasonal Trends Have Been Holding the Market Back
They don’t call it ‘the dog days of summer’ for nothing. At this time of year, people are more interested in barbecues, ball games and golf than the stock market. This creates a rather illiquid market in comparison to the rest of the year. When you have bad news in an illiquid market (like we have seen over the past 3 months), it’s much easier for stocks to fall more than what’s justified – which is exactly what we have seen. I always use the summer as an opportunity to bargain hunt – much the same as Christmas time. I know investors have temporarily lost interest in the markets and many have liquidated several positions. This has created a buyers’ market. When the herd comes back from summer holidays, so will the liquidity and the market will strengthen. I will use that as an opportunity to take some profits.
Debt Crisis Worries
While a debt crisis isn’t a reason to be bullish by any means, knowing that Europe is getting its house in order and will likely band-aid its fiscal woes will help the market turn the corner. Sure, the solution they come up with for Greece isn’t going to permanently fix the problem, but the market doesn’t care. All the market wants right now is to sweep the problems under the rug and move up. We are in a bull-market and this is very typical bull-market behaviour.
Republicans and Democrats are dragging their heels with the debt ceiling issues and the political theatrics have never been more dramatic. With that stated, a resolution (albeit a temporary one) will be determined and the market will breath a sigh of relief. This will open the doors for more liquidity and less timidity from the investing public. I want to be in the market before this issue is resolved. By the way, an increased debt ceiling is going to do wonders for commodity investors’ portfolios.
Technicals Are Pointing to a Higher Market
When it comes to the broad market, I don’t follow technicals a whole lot as I choose to make my decisions almost solely on fundamental data; however, the Dow and S&P have continually been tested by significant sell-offs in the market and have succeeded in remaining above key resistance points. We saw a similar situation about this time last year, and we all know what happened in the fall. We got the mother of all rallies and made a killing. The market has proven itself very resilient during May and June’s sell-off. Do not overlook this fact as it shows there is big institutional money supporting the market.
Another interesting fact was presented by Wall Street Daily. The publication stated “A stock market in motion tends to stay in motion. And when the S&P 500 posts a 5% (or more) first quarter gain, it typically rises another 7.1% before the year is out. That’s according to Birinyi Associates’ data, stretching all the way back to 1928. So the S&P’s 5.4% rise in the January-March period points to more gains ahead.”
To elaborate on that point, the market lost almost everything it gained in the first quarter during May and June. If 2011 can follow what most years that start off with a 5% (or more) gain have done, we could see as much as an 11% rally in the market before the year is out.
As we stated a couple weeks back “Always remember that over the course of history, a typical bull market lasts 3.5 years. This bull market began in March of 2009. We are nearly 2.5 years into the rally and if history is our guide, we have roughly 1 year left in this bull market (let's call it nine months to be safe).”
Price to Earnings Ratios Are Historically Very Low
Price to earnings ratios are the cheapest they’ve been in nearly 20 years. The market isn’t giving viable companies any respect and therefore valuations are suffering. This is a direct sign that the market is timid right now with all the uncertainty in the world economy. I expect that to change as the debt problems around the world are temporarily fixed.
Energy Prices Have Stabilized
While nearly $100 per barrel of oil isn’t necessarily cheap, the price has stabilized in recent months. It’s down from nearly $120 per barrel early in the year, which was deemed one of the three main reasons the economy slowed.
The Fed Will Remain Accommodative to Economic Growth and Job Creation
Interest rates aren’t going anywhere for a long time. This environment will heighten inflation and encourages borrowing by consumers all the way up to corporations.
The Fed’s goal is to create more jobs via low interest rates, which if successful, will put the recession behind us – a tall order indeed, but still a reason to stay in the stock market.
Unemployment is high, but the job market has bright spots which indicate positive changes on the horizon. Working hours in the US have now returned to pre-recession highs. The benefits of this is obvious; more hours worked means more dispensable income, and it also means the consumer is clawing its way back in America. Last month marked the highest consumer credit purchases since August of 2008. The construction sector has finally stopped losing jobs on a monthly basis as well.
Corporations in the US are seeing exports increase to levels not seen in several years.
Inventories have reached almost record lows as a percentage of sales. A stockpiling of inventories is due, which is great for commodity markets as well as a prelude to manufacturing rising.
We are in our 3rd straight month of seeing a high degree of bearish sentiment and a complacency to invest. I wanted to take this opportunity to remind everyone that there are reasons to be bullish on the stock market. I believe 2011 will be very similar to 2010. We had a very bumpy ride during the spring and summer of 2010 only to see a fantastic rally in the fall.
This is a great opportunity to position oneself in the market and snatch up some of the bargain stocks out there. Liquidity will flow back into the market (after Labor Day) and optimism will rise again.
Remember that media headlines are up and down like a yo-yo and always lag. Some quarters they focus on the negative, while others just on the positive. Whatever the headlines are focusing on, I want to do the opposite. If the media is bearish, get bullish.
Lastly, try not to evaluate the market on a day by day basis. Evaluate short-term fundamentals but don’t get caught up in the day to day drama the market will always bring.
Have a great week,
This article represents solely the opinions of Aaron Hoddinott and not of PinnacleDigest.com nor Maximus Strategic Consulting Inc. Aaron Hoddinott is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information is of an impersonal nature and should not be construed as individualized advice or investment recommendations.