What Will Be the Rally’s Next Catalyst? by Sheraz Mian – 07/26/2014

Stocks continue to defy the skeptics, pushing the broad indexes into record territory. But persistent ‘correction’ chatter isn’t going away either, keeping alive questions about the market’s next move. I am adding to that debate in this piece by pointing out an emerging source of support for the market.

Stocks need power to push higher, just as humans and machines do. This ‘power’ comes from a variety of sources, with interest rates and corporate profits as the big ones. Interest rates aren’t a big worry for stock market investors at present, as the U.S. Fed has successfully convinced them that it will keep rates low for a long time. Last year’s anxiety over the start of the Fed’s QE exit has proven unfounded with the program on track to end by October this year.

Unlike interest rates, the earnings picture has not been as clear. Earnings aren’t bad; the level of corporate earnings is in record territory. But the overall trend for more than a year has been of downward adjustments to forward earnings estimates. A big reason for this negative revisions trend has been persistently downbeat management guidance. Many of us saw the disconnect between rising stock prices and falling forward earnings estimates as too big to overlook.

But things appear to be changing – for the better – with the ongoing Q2 earnings season pointing towards a favorable shift in the earnings picture.

I will explain a little later why I am seeing ‘green shoots’ on the earnings front, but it’s probably useful to point out here that I am no ‘permabull’ – far from it. As regular readers know, I have been painfully manning the bearish fort for quite some time. I am not throwing in the towel, but I will be remiss in my duties as the ‘earnings guy’ to not report what I am seeing in real time.

What Am I Seeing Now?

As of Friday, July 25th, we have seen Q2 results from 229 S&P 500 members that combined account for 58.1% of the index’s total market capitalization. Total earnings for these companies are up 9.8% on 5.4% higher revenues, with 69.4% beating EPS estimates and 63.8% coming ahead of revenue estimates.

These numbers don’t make much sense in isolation. But when viewed relative to pre-season expectations and what we have been seeing in recent quarters, there is a notable improvement in the overall earnings picture.

What is the Improvement?

The fact that total earnings in Q2 are on track to reach a new all-time quarterly record and that a bigger proportion of companies are beating earnings and revenue estimates may not be enough to get overly excited about. After all, two-thirds of the S&P 500 members typically beat earnings estimates in any quarter, a function of management teams’ excellent expectations-management skills.

The real improvement is on two fronts – growth & guidance.

Growth has picked up, with total earnings growth in Q2, particularly outside of the Finance sector, on track to be the highest in more than a year. And guidance is ever-so-slightly better than what we have become accustomed to in recent quarters.

Combined, these two developments represent a notable upgrade of the corporate earnings backdrop.

Let Me Explain How…

A high growth rate resulting from easy comparisons (the base period held down for some reason) or concentrated primarily in one industry or a few companies doesn’t mean much. But the Q2 growth rate doesn’t fall in that category – it’s neither due to easy comparisons nor driven by any one sector. In fact, the largest sector in the S&P 500 – Finance – isn’t showing any growth at all. But even Finance’s growth has been better than what was expected a few months back. Bottom line, Q2 is on track for fairly broad-based growth that’s better than what we have been seeing lately.

It’s important to put the reference to guidance improvement in the proper context, as the improvement is fairly subtle at this stage. The majority of companies giving guidance are still guiding lower, but their proportion is smaller than what we have been seeing in recent quarters. And even those that don’t offer guidance have been qualitatively talking up their business outlook.

This modestly improved guidance is starting to have a bearing on estimates for the current period – and the effect is positive. By this time in each of the last four reporting cycles, we had started seeing estimates for the current period come down. But we aren’t seeing that at present. Estimates for 2014 Q3 have held up very well thus far. In fact, they have moved up a tad since the current earnings season got underway. Looking back at the last quarter, we saw some moderation in the negative estimate revisions trend, but it seems to be getting more pronounced at present.

What Does this Mean?

If the negative revisions trend does decelerate as current trends suggest, it will add to greater confidence in estimates for the coming quarters. Stocks have done exceptionally well in an otherwise uninspiring earnings backdrop over the past year or so. And one can reasonably expect them to at least hold their ground, if not do even better, with the earnings wind at their collective backs.

Best,

Sheraz Mian

Sheraz is Zacks’ Director of Research and runs our long-term Focus List that registered the 2nd best performance of any newsletter portfolio over a 15-year period. He also runs Zacks Top 10 which has substantially outperformed the market over the past year with a +46.5% return. You will often find his recommendations featured in Zacks Confidential.

Making Sense of This Market by Sheraz Mian – 05/31/2014

You have seen the headlines – stocks are at
all-time highs.

The market had a choppy start to 2014, but appears to have found its groove lately. The S&P 500 index has moved past the 1900 level and many investors have started looking at the 2000 level as the next target.

Most investors are quite bullish as they see the current uptrend continuing on the back of improving fundamentals and diminishing risks. Others are not so sanguine and cite the sub-par
corporate earnings picture and other macro challenges coming the market’s way.

These contrasting views beg the question of where we go from here. And that’s my goal in this piece – to survey the landscape of bullish and bearish arguments to help you make up your own mind.

Towards the end, I share a robust investment framework that you can rely on irrespective of whether you lean one way or the other in this debate.

Let’s talk about the Bull case first:

1) The Negatives Are Already Priced In: This means the sum total of all bad or negative news about the U.S. and global economy is already well known and reflected in current prices. It seems quite plausible since questions about the Fed, the outlook for the U.S., China, the Euro-zone and Ukraine have been around for a while now and are no longer ‘news’ to any market participant.

2) Economic & Earnings Pictures Quite Healthy: The unusually harsh winter this year pushed GDP growth in the negative in Q1, but the picture has turned around with the Spring thaw and growth is expected to exceed +3% in the current period. The resumption of growth in Q2 is expected to ramp up into the back half of the year and continue into next year. The corporate sector is in excellent shape, with total earnings in record territory and growth expected to notably improve going forward.

3) Central Bank ‘Put’: The U.S. Fed’s QE program is coming to an end, but the overall monetary policy stance across all the major economies, including the U.S., remains favorable and supportive of the market. What this means is that the market has great confidence in the Fed’s ability to keep short-term interest rates at the current near-zero level for a very long time.

Let’s see what the Bears have to say in response:

1) Market Is Pricing a Best-Case Scenario: Market prices reflect consensus expectations, and current consensus expectations for GDP and earnings growth are clearly on the optimistic side. Europe has no doubt stabilized, but the region will likely continue to struggle for a long time. The situation isn’t that better in China either, where the best-case scenario is a stable economy that will grow at rates significantly lower than what we saw in the past decade. The rest of the BRICs appear to have hit a wall as well, which is having knock-on effects all over the world. It is way too optimistic to assume that the U.S. economy and corporate sector will remain immune from the negative forces swirling all around.

2) Economic & Earnings Pictures Far from Healthy: It’s shocking to see that the largest and most diversified economy in the world can be pushed into negative territory by harsh weather alone. I am ok with blaming everything bad on the snow and can appreciate the nice rebound in activity levels in the current period. But I find it hard to buy into the consensus narrative that the U.S. economy is on the cusp of graduating to an above-trend growth in the coming quarters. The story isn’t much different on the earnings front. Yes, the level of total earnings is very high, but there is not much growth and the consensus hope of a growth ramp-up in the second half of the year is likely nothing more than just a hope.

3) The Bond Market Divergence: The rosy consensus outlook for the economy and earnings has convinced investors to pile into stocks, pushing the broad market indexes into record territory. But the bond market isn’t buying that outlook. As a result, bond yields are bucking conventional wisdom and coming down in the face of overall positive economic data. Stock market bulls are hanging on to weak arguments that limited bond supply and Ukraine-related safe-haven trades to explain the downtrend in bond yields. But the most logical explanation is the bond market’s skepticism of the consensus economic outlook. The bond market isn’t infallible; it has been wrong in the past. But it has an overall better track record in foreseeing which way the economy is headed than the stock market.

Where Do I Stand?

As regular readers know, the bearish case makes more sense to me than the alternative. Simply put, I find it hard to envision stocks holding their ground in the current sub-par corporate earnings backdrop. The market hasn’t paid much attention to the persistent negative earnings estimate revisions over the past year or so, likely on the assurance of continued Fed support. But with the Fed on track to get out of the QE business in the not-too-distant future, they have to start paying attention to corporate fundamentals.

Keep in mind, however, that being bearish doesn’t mean that you have to exit the market altogether. There is always an opportunity to make money somewhere in the market. You could go long when you feel bullish or go short when things don’t look so reassuring, or you could load up on defensive stocks or get more aggressive. Keep in mind that you are not restricted to the domestic market as you can always diversify into international markets when opportunities warrant.

Best,

Sheraz Mian

Sheraz is Zacks’ Director of Research and runs our long-term Focus List that registered the 2nd best performance of any newsletter portfolio over a 15-year period. He also runs the Zacks Top 10 which has substantially outperformed the market over the past year with a +46.5% return. You will often find his recommendations featured in Zacks Confidential.

Who Rules the Post-Shutdown Market? by Sheraz Mian – 10/05/2013

	Who Rules the Post-Shutdown Market? By: Sheraz Mian October 05, 2013

We know that Washington likes to take the country to the brink with its partisan ideas before pulling back at the last moment. This time is likely no different. The current budget fight has started weighing on the market, but the losses are modest and the indexes aren’t that far from all-time highs achieved recently.

The current air of uncertainty and tentativeness will lift only after the current impasse comes to an end. But what happens to the market afterwards – once sanity returns to Washington?

Most investors are quite bullish, as they see stocks reaching new highs later this year and next on the back of improving fundamentals and diminishing risks. Others are not so sanguine and cite the sub-par corporate earnings picture and other macro challenges coming the market’s way.

These contrasting views beg the question of where we go from here, particularly after the current Washington Brawl. And that’s my goal in this piece – to survey the landscape of bullish and bearish arguments to help you make up your own mind.

Towards the end, I share a robust investment framework that you can rely on irrespective of whether you lean more to the bullish side or otherwise.

Let’s talk about the Bull case first.

1) The Negatives Are Already Priced In: This means the sum total of all bad or negative news about the U.S. and global economy is already well known and reflected in current prices. It seems quite plausible since questions about the Fed and the outlooks for the U.S., China and the Euro-zone have been around for a while now and are no longer ‘news’ to any market participant.

2) Economic & Earnings Pictures Quite Healthy: We didn’t get the September jobs report due to the shutdown, but other data has been broadly reassuring. GDP growth in Q3 will most likely fall short of what we saw in the preceding quarter. But the outlook remains favorable, with growth expected to steadily improve from Q4 onwards. The corporate sector is in excellent shape, with estimates for total earnings in Q3 not far from the previous quarter’s all-time record and the growth rate expected to ramp up in the coming quarter.

3) Central Bank ‘Put’: Some questions about the future of the Fed’s QE program notwithstanding, the overall monetary policy stance across all the major economies, including the U.S., remains favorable and supportive of the market. This means that even after the Fed starts ‘tapering’ the QE program later this year, it will continue to keep short-term interest rates at the current near-zero level for a very long time.

Let’s see what the Bears have to say in response.

1) Market Is Pricing a Best-Case Scenario: Market prices reflect consensus expectations, and current consensus expectations for GDP and earnings growth are clearly on the optimistic side. Europe has stabilized a bit, but the region will likely continue to struggle for a long time. The situation isn’t that better in China either, where the best-case scenario is a stable economy that will grow at rates significantly lower than what we saw in the past decade. The rest of the BRICs appear to have hit a wall as well, which is having knock-on effects all over the world. It is way too optimistic to assume that the U.S. economy and corporate sector can gain momentum in this backdrop.

2) Economic & Earnings Pictures Far from Healthy: The U.S. economy is no doubt doing better relative to the rest of the world, but that’s nothing more than what the cleanest-dirty-shirt analogy tries to convey. Housing and the labor market are doing better, but GDP growth is unlikely to materially improve from what we have experienced lately. On the earnings front, don’t let the optimistic consensus estimates for Q4 and beyond distract you from the fact that the picture is hardly in good shape. Popular stock market valuation multiples, which the bulls never tire of citing as proof of under- or fair valuation, will start showing otherwise once more realistic earnings estimates are used.

3) The Fed Is in a Bind: The Fed surprised everyone by not tapering at its last meeting, but there is no doubt that QE can’t continue forever. Investors have become so accustomed to the Fed pumping liquidity in the market that they see no difference between ‘tapering’ and ‘tightening’. The non-Taper decision has helped stall the uptrend in long-term interest rates, but they remain elevated relative to just a few months back. The Fed’s recent inability to effectively communicate its intentions about the QE program is likely a sign of things to come as they eventually move towards unwinding the extraordinarily accommodative policy of the last few years.

Where Do I Stand?

As regular readers know, the bearish case makes more sense to me than the alternative. Simply put, I find it hard to envision stocks holding their ground in the current sub-par corporate earnings backdrop. The market hasn’t paid much attention to the persistent negative earnings estimate revisions over the past year or so, likely on the assurance of continued Fed support. But with the Fed on track to get out of the QE business in the not-too-distant future, they have to start paying attention to corporate fundamentals.

Keep in mind, however, that being bearish doesn’t mean that you have to exit the market altogether. There is always an opportunity to make money somewhere in the market. You could go long when you feel bullish or go short when things don’t look so reassuring, or you could load up on defensive stocks or get more aggressive. Keep in mind that you are not restricted to the domestic market as you can always diversify into international markets when opportunities warrant.

Best,

Sheraz Mian

Sheraz Mian is the Director of Research for Zacks and manages our award-winning Focus List portfolio. He is among the experts whose recommendations appear in Zacks Confidential.

 

Market Summary for September 16, 2013 – September 20, 2013

Market Summary for September 16, 2013 – September 20, 2013

Commentary

The major U.S. indices moved significantly higher this week, after the U.S. Federal Reserve surprised the market by deciding not to taper its bond buying programs. By artificially keeping interest rates low, the central bank wants to continue supporting economic growth after downgrading its outlook for 2013 and 2014. But, many investors remain wary of an artificial bubble in the housing market and corporate earnings due to the quantitative easing. Foreign markets followed the U.S. markets higher, with Japan’s Nikkei 225 rising 6.36%, Germany’s DAX 30 rising 1.97%, and Britain’s FTSE 100 rising 0.45%. Emerging markets were among the best performers after the U.S. Federal Reserve’s decision, since low interest rates have forced investors to look towards these markets for yield. In particular, Indonesia saw a robust 5% gain on the announcement after being hit hard the past couple weeks.. SPDR S&P 500 (NYSE:SPY) The SPDR S&P 500 (ARCA:SPY) ETF rose 1.54% this week, as of early trading on Friday morning. After reaching its R2 resistance and upper trend line at 172.97, the index gave up some of its gains and is poised to close the week off of its highs. Traders should watch for a breakout from these levels on the upside next week, or a move down to R1 resistance and the 50-day moving average at around 167.50. Looking at technical indicators, the RSI appears overbought at 70.33, but the MACD remains in a very bullish uptrend since earlier this month. SEE: What The Unemployment Rate Doesn’t Tell Us PowerShares QQQ (Nasdaq:QQQ) The PowerShares QQQ (NASDAQ:QQQ) ETF rose 1.82% this week, as of early trading on Friday morning. After breaking through its R2 resistance last week, the index moved past its upper trend line to set new highs this week above 79.00. Traders should watch for an ongoing move higher or a retest of this trend line on the downside and a potential move to R2 resistance at 78.22. Looking at technical indicators, the RSI appears overbought at 70.04, while the MACD remains in a bullish uptrend since earlier this month. SEE: Spotting Trend Reversals With MACD Dow Jones Industrial Average (NYSE:DIA) The SPDR Dow Jones Industrial Average (ARCA:DIA) ETF rose 1.41% this week, as of early trading on Friday morning. After breaking above its prior high, the index took a downturn just before its upper trend line at around 158.00. Traders should watch for a test of this level on the upside or a move down to R1 resistance at 153.04 on the downside. Looking at technical indicators, the RSI appears overbought at 69.45 alongside many of the other indices, but the MACD remains in a near parabolic upswing since earlier this month. iShares Russell 2000 Index (NYSE:IWM) The iShares Russell 2000 Index (ARCA:IWM) ETF 2.16% this week, as of early trading on Friday morning. After moving higher to test its R2 resistance at 107.47, the index leveled off towards the end of the week to around 106.93. Traders should watch for a breakout from these levels towards its upper trend line on the upside or a move down to its R1 resistance and 50-day moving average on the downside at 103.93. Looking at technical indicators, the RSI remains more modestly overbought than the other indices at 66.76, but the MACD suggests a robust bullish uptrend since the beginning of the month. SEE: Candle Sheds More Light Than The MACD The Bottom Line The major U.S. indices moved largely higher this week following the U.S. Federal Reserve’s announcement. While RSI indicators suggest that the indices may be overbought and due for a correction before a significant move higher, MACD trends remain bullish for the most part across the board. Next week, traders will be watching a number of economic reports, including durable goods and new home sales on the 25th, jobless claims and GDP on the 26th and personal income and outlays data on the 27th. Charts courtesy of stockcharts.com At the time of writing, Justin Kuepper did not own any shares in any of the companies mentioned in this article.

1700 Plus, Here We Come! – 07/18/2013

Stocks continued their march towards 1700. The path was made easier with a strong Jobless Claims report. Even more impressive was the Philly Fed Survey with a shockingly good +19.8 versus +9.0 expected.

The importance of the latter announcement is that it echoes strength found in other regional manufacturing reports like Empire State on Monday. If the manufacturing sector springs back from recent malaise, then it bodes well for future GDP readings… and corporate earnings… and the stock market.

There are no expected economic events Friday. Likely stocks will ride this recent momentum up to test 1700. This builds up the suspense for a potential break out next week. My guess is that a consolidation period will ensue as we trade around 1700 for a week or two then move up into the mid-1700’s.

Best,

Steve Reitmeister (aka Reity…pronounced “Righty”)

Executive Vice President

Zacks Investment Research

Is the Correction Over? – 07/09/2013

Friday’s Government Employment Situation did the trick to get stocks back above their 50 day moving average for the first time since mid-June. And that bullish continued on Monday.

This begs the question: Is the Correction Over?

I believe the answer is YES based upon 3 simple, yet powerful reasons.

1) US economy continues to grow which will aide corporate earnings.

2) Bonds finally losing money with investors moving more money to stocks.

3) The trend is your friend til proven otherwise. Meaning the 4 year bull rally needs to be pushed out of the way for good reason… and that reason doesn’t currently exist.

As for point #1, Alcoa kicked off earnings season with a solid report tha t has stock futures looking up again for Tuesday.

Fight the trend at your own risk.

Best,

Steve Reitmeister (aka Reity…pronounced “Righty”)

Executive Vice President

Zacks Investment Research

Are My Eyes Deceiving Me? – 06/26/2013

Are My Eyes Deceiving Me?

Let me see if I got this right. On Tuesday the economic data looked great. Durable Goods, Case-Shiller HPI, Richmond Fed Mfg and Consumer Confidence were ALL better than expected. This likely increases the odds of QE removal. And yet stocks ACTUALLY went up???

Yes, I am being sarcastic because this is the way things should be. Meaning:

Positive economic data = higher GDP = higher corporate earnings = higher shares prices

Yet, of late the equation has been perverted by those afraid of QE tapering. I am not one of them.

The logical next question is: How will investors react to positive economic data going forward?

I would like to think that investors will react as they did on Tuesday with a nearly 1% rise in S&P 500. However , I sense that with stocks still under the 50 day moving average and not so great headlines coming out of China, that the bears will be in control a while longer.

That is why I am only 60% long right now as opposed to the 100%+ long the majority of 2013 up to this point. I recommend you consider similar defensive measures until we get closer to 1500 which will present better buying opportunities.

Best,

Steve Reitmeister (aka Reity…pronounced “Righty”)

Executive Vice President

Zacks Investment Research

Fear of the Unknown – 06/21/2013 – Zacks.com Profit from the Pros

Fear of the Unknown

Stocks had their biggest one day sell off of the year and now we find ourselves under 1600 once again. This has many investors scratching their head as to what changed the mood so much, so fast?

FEAR OF THE UNKNOWN

Investors crave clarity. And when that eludes them, they typically assume the worst.

Yes, there is greater clarity that the Fed is gearing up to remove QE. The problem is; What does the economy and investment landscape look like in the post QE world???

Those throwing their stocks overboard are concerned that it will mean slower economic growth which is not particularly appealing for corporate earnings and share prices. Yet there are many academics who point out that all the extra QE did not really create any economic benefit. So its removal should not be a feared event for future growth.

Further, with bond rates likely rising a notch or two more, it will lead to ample losses in bond funds. Not all that money will flow to cash. So stocks will continue to be an attractive destination for those seeking a positive rate of return.

Unfortunately, the sailing has been too smooth and easy up to this point. The Market Gods demand payment for that now in the form of a correction to test our fortitude. Technicians have pointed out 93 different levels of support that we could fall to (meaning they have no clue).

Likely somewhere between here and 1500 the correction will end. In that time those seeking clarity will become more settled that the economy rolls on and that stocks are still the most attractive investment alternative. Until that time it pays to be more defensive.

Best,

Steve Reitmeister (aka Reity…pronounced “Righty”)

Executive Vice President

Zacks Investment Research

7 Sequestration Facts Every Investor Should Know – 03/10/2013

7 Sequestration Facts Every Investor Should Know
by Mitch Zacks, Senior Portfolio Manager

Federal sequestration spending cuts are now being implemented. This will affect the market and economy in several ways that investors must be aware of.

Today we will outline 7 important facts that every investor should be aware of in regards to the budget cuts.

1. The Size of the Budget Cuts

The Federal government has agreed to reduce spending by $1.2 trillion over the next nine years, which amounts to $130 billion a year. This is set to start immediately and then ramp up over time. This fiscal year, $85 billion in cuts are required, and then $85 billion the year after. Subsequently, the spending cuts ratchet up in the years following.

Keep in mind, U.S. GDP is $16 trillion, and the budget deficit is 5.3%, or $840 billion. Therefore, spending cuts of $85 billion takes the U.S. deficit to roughly $760 billion. As U.S. government spending decreases, it reduces GDP, reduces corporate earnings, and could have a negative effect on the market over the short-term.

2. Defense Spending Cuts

A pullback in defense spending is the biggest news.

None of these cuts will fall on enlisted military members pay, but they will cause cutbacks to the civilian defense labor force and the ongoing training these individuals receive. Many big budget and high tech defense programs seem to be on the chopping block as well, so the cuts could stretch across the defense industry as a whole.

3. Negative Effect on Defense Industry

The U.S. has the world’s largest aerospace and defense market and the world’s largest military budget. The industry is largely dependent on U.S. government contracts. Defense spending by the government therefore decides the outlook for the industry.

The bottom line is that many defense related companies will be negatively affected by the sequestration, and ultimately the prices of defense industry stocks will tend to fall.
The sequestration will hurt large defense contractors, but smaller companies will fare far worse. Smaller companies are less diversified than many of their large cap counterparts, and these cuts will have a greater effect on their bottom line.

As a result of the sequestration, we think the earnings of small-cap defense industry stocks will be under pressure.

4. Greater for Long-Term GDP Growth

While the sequestration will be a negative for economic growth in the short term, we believe the spending cuts will result in a rise in private growth over the long term.

The U.S. Federal deficit needs to be reduced in order to raise the long-term growth rate potential of the economy. As the U.S. government continues to run a deficit, there is an increasing amount of debt that is issued in the form of treasury bonds.

This debt crowds out investing in the private sector. In the private sector, new ideas, products and companies may not get funded at a lower rate because investors tend to purchase government debt as opposed to lending to corporations. As the debt is reduced, or at least stops growing at such a rapid rate, the economy will benefit over the long term because it will lead to positive growth for the private sector. We believe this is why the market has not reacted negatively to the sequestration. At the end of the day, cutting spending helps long-term GDP growth.

5. Help for the U.S. Credit Rating

Cutting spending helps ensure previous deficit spending won’t ruin the credit rating of the U.S. International bond investors would not be happy if U.S. debt continues to grow astronomically. Reduced spending will help prevent a downgrade of the U.S. credit rating.

We see an improvement in the U.S. credit rating as a positive for the market.

6. Budget Cuts Do Not Tackle The Big Issues

The biggest problem with sequestration is that it does not address entitlement programs. Medicare and Social Security are not being touched. Politically, both sides of the aisle do not want to touch entitlement programs that support the elderly because of the historic consequences on national elections.

7. The Budget Cuts are not likely to cause a Stock Market Reversal

The stock market is soaring to new highs, largely, because of the Fed’s quantitative easing programs. The biggest risk to the market is the reversal of those programs as we believe that would trigger a massive sell-off in the equity market.

Cutting spending actually reduces the risk that quantitative easing will stop. This is because the budget cuts soften the economy, which allows the Fed to continue to essentially print money. Effectively, budget cuts increase unemployment and therefore reduce the chance that the Fed is going to scale back their quantitative easing programs anytime soon.

Cutting spending has become a sideshow. The Fed is the key. The fact that the stock market is approaching new highs is proof that the market and economy are fine with these cuts.

What’s Next

Down the road, we need to see the politicians agree to more spending cuts, and agree to do it rationally. This would help the stock market and the economy. So far, they are not doing it in a coherent, economically efficient, fashion.

We continue to believe over the long-term the market is attractive at these valuation levels.

About Mitch Zacks

Mitch is a Senior Portfolio Manager at Zacks Investment Management. He wrote a weekly column for the Chicago Sun-Times and has published two books on quantitative investment strategies. He has a B.A. in Economics from Yale University and an M.B.A. in Analytic Finance from the University of Chicago.

Mitch also is a Portfolio Manager for the Zacks Small Cap Core Fund ( ZSCCX ).

The Weekly Report For October 29th – November 2nd

Commentary

The United States markets moved higher this week, despite Hurricane Sandy’s impact on New York. Major stock exchanges shut down for the early part of the week, resulting in thin trading on the physical exchanges, while many traders were left without power and others simply took the week off. But, last week’s corporate earnings sell-off seems to have halted for the time being, even though many economic indicators this week came in worse than expected. Global markets have been roughly on par with U.S. markets this week. Britain’s FTSE 100 jumped from $5,780 to around $5,860 this week, while Germany’s DAX improved from $7,200 to around $7,350 over the same time. However, the eurozone continues to struggle with a record high unemployment rate of 11.6% that came in above expectations, while some manufacturing indicators also suggested a prolonged slowdown for the region. S&P 500 SPDR ETF (ARCA:SPY) The S&P 500’s SPDR (ARCA:SPY) ETF moved higher this week, reaching back up to a $143.41 50-day moving average that was broken in late October. Since the move occurred on low volume due to Hurricane Sandy, traders will be watching closely to see if the index can break through the key moving average next week and reverse the downward trend. Meanwhile, the moving average convergence divergence (MACD) could also see a bullish crossover, if the index moves higher next week, paving the way for a potential move to a 52-week high at around $146. SEE: A Primer On The MACD Dow Jones Industrial Average SPDR (ARCA:DIA) The Dow Jones Industrial Average SPDR (ARCA:DIA) ETF moved higher this week and, like the SPY ETF, reached towards its 50-day moving average at $132.98, which was breached in mid-October. Since the move occurred on low volume due to the storm, traders will be watching to see if the index breaks through the key moving average in a more sustained move higher before initiating any bullish positions. Meanwhile, the MACD indicator remains at a low and could see a bullish crossover as well, if the index moves higher next week, suggesting what could become the beginning of a more sustained move higher. SEE: Trading The MACD Divergence PowerShares QQQ ETF (Nasdaq:QQQ) The PowerShares QQQ (Nasdaq:QQQ) ETF rebounded off of its 200-day moving average priced at around $64.99, but investors will watch to see if the move is sustainable next week, since this week’s trading occurred on low volumes due to the storm. For now, traders will be looking for the index to remain priced between the 50-day moving average on the upside at around $67.97 and the 200-day moving average on the downside at around $64.99. Meanwhile, the MACD looks like it may be about to see a bullish crossover, signaling a possible move up.       iShares Russell 2000 Index (ARCA:IWM) The iShares Russell 2000 Index (ARCA:IWM) ETF moved higher this week, alongside the other major U.S. indexes, rebounding off of its lower trend line at around $81.00 on heavy buying volume. The index is now trying to break out above a key 50-day moving average at around $82.93 before making a more sustained move higher. Meanwhile, the MACD could see a bullish crossover that could signal a further move higher to the next major resistance levels at prior highs at around $86 or the upper channel trendline. SEE: Interpreting Support And Resistance Zones The Bottom Line The major U.S. indexes continued to push up against resistance levels this week after the prior week’s move down due to poor corporate earnings. While traders will keep an eye on economic news out next week, the little volume that happened this week on the major indexes suggests that the mini recovery will be taken with a grain of salt. Next week’s trading may continue to be on the lighter side, but should provide traders with a clearer view of what’s ahead. In particular, traders will be watching for the ISM Services Index on November 5, U.S. Jobless Claims on November 8 and the U.S. Consumer Sentiment on November 9 to guide trading. Charts courtesy of stockcharts.com At the time of writing, Justin Kuepper did not own shares in any of the companies mentioned in this article.