Sarmad and RtS, Some news on "How Good It Is"
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<<7 reasons (and 15 stocks) for year-end optimists
Too many killjoys say the current upswing is too good to last much longer. Here's why they're wrong -- and how to ride this terrific trend.
By Robert Walberg
Some people aren’t happy unless they’re miserable. I’ve never understood this mentality, but you see it all the time. That's especially true in the market, when you see killjoy investors and analysts who constantly express worry over this or that.
The current situation is a perfect example. The economic and earnings backdrop is about as positive as it gets, yet not a day goes by that we don’t read that the bull market is tiring; why last quarter’s 7.2% GDP growth rate was somehow artificially inflated; or how sluggish single-digit sales growth diminishes the significance of double-digit earnings growth.
After experiencing three years of market hell, you would think these folks would want to sit back and simply bask in the glory of a strong bull market. Unfortunately, they can’t -- but that doesn’t mean that you shouldn’t.
7 reasons for optimism
One of the basics of technical analysis is that the trend is your friend. It’s a little trite, but sometimes we overanalyze the market and talk ourselves right out of good positions. If you find yourself conflicted by the growing cacophony of bearishness, step back, take a deep breath and consider the following seven reasons it’s important to stay the course.
* Earnings: More than 80% of the S&P 500 ($INX) companies have reported earnings over the past few weeks, and the numbers are sensational. Third-quarter earnings are up 20% over last year, or about 5% better than the market expected. Equally as important, companies have generally raised guidance for the next couple of quarters. In other words, the earnings news should be decidedly bullish for at least another six months. Soft comparisons and aggressive streamlining are big contributors to the favorable earnings backdrop, but it’s also important to note that demand also is ramping up, albeit slowly. However, with the bottom line highly leveraged because of leaner operations, even a modest pickup in demand (beyond expectations) would result in even stronger earnings growth than currently projected.
* Economy: Last quarter’s annualized GDP growth of 7.2% bears repeating. Even if you assume that the number is inflated a bit by the tax rebates, you have to be impressed by the economy’s momentum. As long as inventories remain lean, we could be looking at quarterly GDP growth north of 4% well into next year. That’s very encouraging. Of particular interest in last quarter’s GDP figure was the strong 15% growth in business investment on software/equipment. Given that the recent recession was triggered by a dramatic decline in business spending (especially in technology), a reversal of this pattern is essential to sustaining growth.
* Interest rates: Despite the strong economic growth, interest rates remain extremely low by historic standards because of the lack of inflationary pressures. Rates will either remain essentially flat or move modestly higher from here over the next six to 12 months, but at this stage slightly higher interest rates won’t dampen the enthusiasm for stocks. Clearly, higher interest rates alter the valuation equation a bit, but as long as the rate rise is tied to a growing economy that’s producing jobs and driving earnings growth, the bull market will not be undone by modestly higher interest rates.
* Seasonals: Moving from market fundamentals to market technicals, we are entering what has historically been the best six months of the year. Over the past 53 years, the Dow Jones Industrial Average ($INDU) has gained 10,560 points during the months of November through April. It’s also important to note that during these best six months, the Dow has risen in 41 of the 53 years, for a success rate of 77%. Basically, history suggests that the market has at least another six months of gains left -- potentially rather impressive gains, as the Dow has averaged a 16% advance in the November-April period when the index was up by at least 9% in the preceding May-October period (as it was this year).
* Momentum: All the major market indices are enjoying strong double-digit gains this year. The number of stocks establishing new 52-week highs each day continues to dwarf the number of stocks setting new lows. Volume figures remain bullish, as we routinely see more volume on up days than on down. The indices continue to hold above their 50- and 200-day moving averages, with both averages trending higher. Why on earth would you want to sell stocks in a market exhibiting this kind of underlying strength?
* Cash inflows: With interest rates expected to hold steady or rise slightly, bonds are no longer a very attractive alternative to stocks. Consequently, we are witnessing money managers engage in a steady and very meaningful rotation back into stocks from bonds. Many managers were slow to buy into the current bull market and, as such, they are now chasing performance. This dynamic, along with the evolving economic picture, suggests that we will continue to see money flow out of bonds and into stocks. These cash inflows act as the fuel that drives the market engine and help to explain why the market rebounds on every dip.
* No place else to be: We have the world’s largest economy growing at north of 7%; corporate earnings growing by more than 20%; inflation in check and interest rates at historically low levels; a manufacturing sector on the mend; job growth beginning to kick in; the most creative and productive employee base in the world; and high levels of consumer confidence/spending. I don’t know about all of you, but with that as my backdrop there’s no place else I would rather be investing than in U.S. equities.
Having made the case for staying the course and riding out the bull market, the next question is which stocks are likely to outperform. Well, for the next couple of months, anyway, I suggest sticking with the sectors that have led the market to this point. That includes stocks from groups such as internet services, consumer electronics, semiconductors, metals, home construction, communications technology and specialty retailers. Typically, at this point in the year, leadership names tend to maintain their momentum into year-end. Some stocks worthy of consideration from within these groups are: Drugstore.com (DSCM, news, msgs), WebMD (HLTH, news, msgs), Nokia (NOK, news, msgs), Nvidia (NVDA, news, msgs), Genesis Microchip (GNSS, news, msgs), Zoran (ZRAN, news, msgs), AngloGold (AU, news, msgs), Ryland (RYL, news, msgs), Toll Brothers (TOL, news, msgs), Lucent Technologies (LU, news, msgs), Motorola (MOT, news, msgs), Hot Topic (HOTT, news, msgs), Pacific Sunwear (PSUN, news, msgs), Chicos FAS (CHS, news, msgs) and Electronics Boutique (ELBO, news, msgs).
As we move to mid-December, however, it will be time to take some profits out of the leadership issues and prepare for the usual year-end bargain-hunting rally. Basically, you will want to make selective purchases from the list of stocks making new 52-week lows in anticipation of the usual seasonal bounce. In several weeks, I’ll report back with a list of such candidates. In the meantime, relax, watch some football, spend time with the family and simply enjoy the ride.>> |
