Further Reasons Why the Bull Rally will Endure!
The Line the Bulls Need to Crack!
Friday, December 09, 2011
It’s been three great years for stocks, particularly considering that the Dow Jones Industrial Average hit 6,440 on March 9, 2009, and many investors jumped ship -- totally gave up on stocks as opposed to seeing it as a buying opportunity.
The rally in stocks we saw in 2009 caught most investors by surprise. In fact, most retail investors totally missed the rally in stocks that started in March of 2009.
The returns for stocks in 2010 (about 10%) were not as great as 2009 (the “easy money” year for stocks). This year is turning out to be another winner for the Dow Jones Industrial Average, but not a big winner like 2009 or 2010.
The market hardly moved Tuesday. Volume ran low once again as the indices moved sideways all session. To the bulls' credit, some indices managed slight gains during the session despite the tumult in Europe.
However volume picked up again Wednesday, but was still below average for this time year. But volume has been low for basically the entire second half of the year, so don’t read too much into Tuesday's light volume day.
Banks Join the Bull Rally
Far more notable than the low volume was the impressive day big bank stocks had on Wednesday. A strong rally is usually reliant on the fact that big bank stocks participate.
Big bank stocks are not only participating in the latest bull rally, but the financial sector is leading the charge higher. The financial index is up 12% since the rally began and was up another 1.3% Wednesday. As long as the big banks post big gains, the market is going higher and SPX is going to 1300, therefore it would be advisable to remain bullish.
Yesterday was slightly different – the nervousness of the bears came to the fore again – over-shadowing the bull’s forward motion! However, this is not in any way the way it will pan-out for the future.
There are many factors that are in play that will see the bull rally prosper as discussed in several earlier articles:-
Further Developments Abound Supporting a Bull Rally
On Monday, after the market close in the U.S., Standard and Poor's put 15 EU countries under threat of downgrade. More notably was that Germany made the list of potential targets by the Standard and Poor's credit rating agency. Yes, that is the same credit agency that missed the ball about big banks five years ago.
Typically, when a major economic country like Germany is threatened with a downgrade the stock market will fall. Added to the threat were 14 other European countries, so the stock market should have really plummeted.
Yet, the exact opposite occurred - the indices rose or marginally decreased. Many investors are quite confused as to why this occurred! Why would the market rise on a day after Standard and Poor's all but said, "Europe is screwed" to the investment community?
There is definitely reasoning behind this phenomenon why no one cared about a 15 nation downgrade threat. It is not that there is no real threat in Europe, and all the hoop-la surrounding the way the growth of inflation in the economy could cause it to burst at any given time.
However, the facts need to be observed:-
1. Basically, it was a threat, not an actual downgrade. Standard and Poor's only threatened to downgrade and they cited the EU Summit this weekend as one of their reasons for delaying a downgrade. Clearly, the rating agency sees the potential to form a solution and restore economic growth to the EU.
2. The Standard and Poor's rating agency waited to downgrade 15 countries in Europe because of the EU Summit this week. Clearly, investors are optimistic a deal will be done. Additionally, investors have fought through worse news this year, such as lower GDP revisions, higher unemployment and rising interest rates. It will take a lot more than a threat to frighten investors after this roller-coaster ride and derail the bull rally mentality.
3. A more abstract point-of-view is that back in October the indices looked to have bottomed, many investors went aggressively long during that time and the market complied and went on a ridiculous rally higher. The action, therefore, could be viewed that in late October and all of November was a consolidation phase of a bull trend that began October 4. And within that bullish trend November 25 as a lesser swing low. Until either of those lows is violated, the trend is bullish. And in bullish trends stocks go up and the bull rally prospers. The news can be as bearish as possible, but with institutional funds very under-invested and bearish sentiment on a private level higher than normal, odds favor a sluggish push higher for all major indices.
Expectations will be very limited from the market this week. A general index-wide pullback is normal after an 8% push higher. Only a complete breakdown in EU negotiations, as well as U.S. Congressional budget talks, could halt the bullish momentum and turn the indices bearish. SPX continues to consolidate at 1250, although I think it fell to a low yesterday. But that level should be heavy support.
We may know something more definite before the week is done, but it is more likely that the outcome will not be known for many more months. And this situation is certainly helping to currently drive the bull rally.
Cracking the Resistance Line to Continue the Bull Rally
The S&P 500 (SPX) has been hammering at the 200-day moving average for almost two months. More recently, buyers have also been attacking the bearish resistance line that connects the May and July highs with the October high. That line represents the intermediate downtrend. If it gives way, the intermediate trend will turn to neutral.
With momentum positive, the bulls are increasing the odds that they will poke through this resistance line. No line can resist forever, and the longer buyers can sustain the attack on this level the more likely it will eventually give way. It is simply a matter of numbers since there are a fixed number of sellers, and once they are removed, prices will move higher.
But like a defensive position in the battle between the bears and the bulls, there are reserves available to plug the breach. So even if 1,266 and then 1,293 were to be surmounted, buyers that took positions from April to July will be jumping in to sell stocks that they’ve held for four to eight months. And others that bought close to the 1,330 line may increase the potential sellers and, thus, the difficulty to sustain a meaningful bull rally may be brought into contention.
Here is another pleasing area where the bulls are shining! With third-quarter earnings largely in the books (99% of S&P 500 companies have reported for Q3 2011), the chart below provides some long-term perspective on the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. The chart illustrates how earnings declined over 92% from its Q3 2007 peak to Q1 2009 low, which brought inflation-adjusted earnings to near Great Depression lows.
Since its Q1 2009 low, S&P 500 earnings have surged (up over 1100%) and currently come in at a level that is greater than what occurred at the peak of the dot-com bubble and very near what occurred at the peak of the credit bubble. It is interesting to note that the original run up in real earnings from Great Depression lows to credit bubble highs took over 78 years. The current spike has taken 29 months.
2012 – Presidential Election Year
The year 2012 is a presidential election year. The Dow Jones Industrial Average almost always rises during presidential election years. Over the past 60 years, there have been only two exceptions: the year 2000 and the year 2008—the Dow Jones Industrial Average went down those two presidential election years.
There are many positive signs for stocks:-
• Corporate America is making money; they stand ready to cut payrolls if hard times come back; and they are flush with $2.0 trillion in cash.
• Investors are still wary of the stock market. If the overhang that the eurozone crisis has on the market can be lifted, the Dow Jones Industrial Average would rally sharply.
• Monetary policy remains very favorable, interest rates still very low.
• It appears that the high unemployment rate in the U.S., which has been a drag on an economy, is finally getting some support – even though it is little-by-little, and
• Consumer spending is on the up.
• Housing is making a come-back.
• The government spending or the national debt is being addressed – although in many people’s minds – too slowly.
The bears, who have tried to dominate the market, are slowly coming to the end of their reign, which will mean that the Dow Jones Industrial Average will start to move upwards, in leaps-and-bounds, when this tie is broken fully and the bull rally will be fully realized.
And a presidential election year could be a great time for it to happen.