Back to the Highs… Now What?

More than 75% of Greek bondholders agreed to the swap nearly assuring that the deal will go through. That good news, in combination with yesterday’s strong ADP employment report, gave investors a reason to get back up to the old highs around 1370. However, we’ve been lingering around this spot for a few weeks.

What happens next???

Unfortunately the path ahead is not crystal clear. I see 3 potential outcomes for the stock market which I will share below (from most to least likely):

1) Melt Up to New Highs: The bull market has been running strong for a few months. But really the last month has been more of a slow melt up. Where over the course of a week there may be 3 up days and 2 down. Each week’s modest gain doesn’t look like much until you pull back to the big picture and find that it indeed is a breakout out to new highs. This would have us on course for 1400 by the end of March in time to see what earnings season has in store.

2) Consolidation: We have already come a long way in a short period of time. Perhaps investors can quickly forget the recent Greek tragedy and focus in on the surprising health of the US economy. In this case, the bull run stops here and plays in a 3% range (1330 to 1370) awaiting the results of earnings season in mid-April.

3) Rage Higher: Perhaps investors can quickly dispense of the recent Greek tragedy and focus in on the surprising health of the US economy. If so, then we rush up to new highs of around 1420. Then perhaps a modest consolidation before earnings season begins.

Again, I see #1 as most likely. The next step for you is to determine which scenario you believe in and then align your portfolio accordingly.

However, I bet there are many of you who are unsure of what will happen next. And are tired of chasing the ups and downs of this market. Instead you’d rather have an investment approach that helps you top the market while still being able to sleep soundly at night (no matter what Mr. Market is doing).

Best,

Steve Reitmeister
Executive VP, Zacks Investment Research

Pardon the Interruption

Just as we were all abuzz about the strengthening US economy. And just as we were starting to forget that Europe was even on the map. And just as US stocks were about to make new highs, the European debt mess demanded that we pay attention to it once again.

The problem on Tuesday was that the Greek debt swap may not go through as not enough bondholders may be willing to take the necessary haircut. This raises the specter of a Greek default. No surprise European markets were in the tank. And we came down along with them (but at only 50% of the beating they took).

So now what happens?

I believe the estimates of $1 trillion euro damage from a Greek default is WAY overstated. With over $1 trillion loaned out from the ECB to backstop the banks. And with plenty of time for banks and investors to prepare for this possibility… it just won’t be that horrible. However, since the market hates uncertainty, then this gloom may persist until the situation is cleared up.

What if the US employment reports are robust?

Before Greece re-entered center stage I believed that this week’s US employment reports were the key to the market. If strong, then it would act as a catalyst to make new highs of 1400+. Now the benefits of a positive report are shrouded in doubt thanks to the Greek tragedy. Note that if the jobs reports are bad, then I am fairly certain it spells the end to this leg of the bull run and best that we all prepare for another 3-5% downside.

Long story short, expect the best, but prepare for the worst.

Best,

Steve Reitmeister
Executive VP, Zacks Investment Research