Elements Ripe for Breakout – 08/02/2013

How are you enjoying August so far?

Yes, that is a rhetorical question because the flow of economic data made it easy for stocks to breakout above 1700 to new highs. In that parade of data we had:

•  Jobless Claims ebbing lower to 326K which corresponds well with higher job adds.

•  ISM Mfg soared to 55.4 vs. 50.9. Plus New orders thriving at 58.3.

•  PMI Mfg corroborates ISM strength moving up to 53.7 with New orders at 55.5.

•  And just for good measure European manufacturing came in at an expansionary pace above 50 for the first time in a year.

This all bodes well for a further breakout above 1700 as the large stockpile of investor cash finds a better home wit h stocks.

Best,

Steve Reitmeister (aka Reity…pronounced “Righty”)

Executive Vice President

Zacks Investment Research

Flash: Pre FOMC highs for EUR and GBP are technically significant – BBH

Flash: Pre FOMC highs for EUR and GBP are technically significant – BBH

2013-06-24 07:04 GMT | FXStreet.com

FXstreet.com (Barcelona) – Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman believes that technically, the highs the euro and sterling recorded before the FOMC announcement are significant.

He begins by noting that they mark the end of the correction off the year’s lows set in late March by sterling in early April by the euro. Further, the euro overshot by a little the 61.8% retracement of the decline seen from the start of the year, while sterling stopped a little shy. He sees that both upside corrections unfolded in a three-leg sequence, which is common for counter-trend moves.

Chandler believes that the correction is over and the dollar’s underlying uptrend is resuming, and while there is some risk of near-term consolidation, he expects the dollar to make new highs for the year against the European currency complex. He writes, “Recovery upticks in the euro will likely be capped in the $1.3220-60 range, while sterling’s bounce will likely be limited by the $1.5500-50 area. On the downside, the next target for the euro is $1.3060 and then $1.2975. The trend line drawn off the early April and mid-May lows comes in near $1.2850 at the end of next week.”

Tech is a Hot Mess – 10/19/2012

The clamor of bad news from tech only grew louder on Thursday thanks to a premature press release from Google showing a massive earnings miss. This was followed after hours by disappointing news from Microsoft. When you combine that with poor showings from Intel and IBM it becomes hard to find a silver lining from this news.

What does it mean?

This weak earnings season is only getting weaker. The number and variety of companies with lackluster news extends beyond these tech behemoths. It may become hard for the market as a whole to trudge higher at this stage without some stronger catalysts.

Yes, I recently said that stocks were undervalued. That is unchanged. But investors never take a straight path from undervalued to fair valued. Instead we take more of a meandering course with tons of detours and pauses for reflection.

So after moving up towards the highs once again, I think we will sink back lower in the range. And probably will stay there through the election. Afterwards, if the economy is improving as it is now, then we will likely have a Santa Claus rally that gets us to around 1500.

As such, I am lightening up my long positions til early November in my trading account. Then plan on getting back to 100% long with good odds of making new highs to ring in the New Year.

Best,

Steve Reitmeister (aka Reity… pronounced “Righty”)
Executive VP, Zacks Investment Research

Fiscal Cliff Fear is #1 Problem

On Friday I asked the Zacks community what they feared the most right now (Europe, China, Fiscal Cliff or nothing as market will move higher).

Not surprisingly the Fiscal Cliff was the #1 concern as it would be a poison pill for the economy to swallow. Gladly I think there is some relief on that front:

If Obama is elected, then he promises that 98% of US citizens will see an extension of the Bush era tax cuts.

If Romney is elected, then he promises that 100% of US citizens will see an extension of those cuts plus another 20% decrease in rates with elimination of some write offs.

Meaning that a good chunk of the Fiscal Cliff problem has already been addressed by the candidates. And since most Presidents earn a good chunk of political capital from the election, then they will likely get passed whatever they want out of the gate.

So I like the odds for this just to be a consolidation period followed by a move to new highs. More a matter of “when” instead of “if” in my book.

Best,

Steve Reitmeister (aka Reity… pronounced “Righty”)
Executive VP, Zacks Investment Research

Beige, Black & Blue

The Fed’s Beige Book echoed what we have seen in other recent economic reports. That being a modestly improving US economy. Unfortunately that peppier tone was not good enough to stop Wednesday from being the 4th straight day of losses for stocks.

Pulling back to the bigger picture, this just looks like another consolidation period for a market intent on hitting new highs. To make that a reality we need economic data to stay on its current healthier track. And we need this earnings season to surprise to the upside. Both are likely outcomes.

Unfortunately there is a 3rd factor which might mitigate the above factors. That is the tightening of the US presidential race. As pointed out numerous times in this column, investors disdain uncertainty. Therefore, the unclear final outcome of this election may put the market on hold til early November no matter the status of earnings or the economy.

Don’t Quit on the Market Just Yet

Too often customers read about a trading range or consolidation period with the assumption it’s time to head away from stocks. That would be foolish.

Gladly we are in the midst of earnings season which always offers a great opportunity to latch onto exceptional companies ready to soar.

Best,

Steve Reitmeister (aka Reity… pronounced “Righty”)
Executive VP, Zacks Investment Research

What’s Next: 1400 or 1500?

Fridays traditionally carry out whatever trend was going on earlier in the week.

If big bear on the prowl, then Friday will growl.
If big bull on the stampede, then Friday gains will proceed.

What it means for the next week and beyond is less clear. The two most likely scenarios are:

1)  Settle into range now. With low of 1400.
2)  Run to 1500 before correction.

In previous commentary I noted that #1 was the most likely as we attempt to clear other hurdles like the Fiscal Cliff. But I do see how the headlines of making new highs could attract a rush of fresh money from the sidelines before hitting a serious point of resistance like 1500.

Because #1 is not that ominous and #2 is bullish, then I will stay long this market for now. If the run to 1500 does ensue, then I will look for spots to take profits as shares will likely correct thereafter.

Best,

Steve Reitmeister (aka Reity… pronounced “Righty”)
Executive VP, Zacks Investment Research

Muddle Through Economy Wake Up Call

Stocks gave back a little on Monday after bursting out to new highs last week. That is to be expected.

From here we will likely trade in a narrow range as investors await the next move from the Fed this Thursday. It’s a shame that it has come to this.

We don’t need more QE at this stage. And I fear doing so only sends the wrong signal to QE addicted traders. Let them throw a little tantrum if they don’t get what they want as more seasoned investors will gladly buy up shares on the dip.

Welcome to the Muddle Through Economy.

It never looks that good. And never looks that bad. When you start to appreciate that slow and steady is the pace, then easier to shake off all the false signals that tempt you to believe otherwise. And yes, slow and steady did win the race for the tortoise over the hare.

Best,

Steve Reitmeister (aka Reity… pronounced “Righty”)
Executive VP, Zacks Investment Research

Muddle Through Reminder

The S&P flew up to new highs in early April on the wings of strong economic data while Europe and China were kind enough to stay out of the headlines. The problem with this scenario is that some thought that the economy was more robust than it truly was. Recent weaker economic news, like today’s ISM Services showing, throws cold water on the notion of a hotter economy.

On the flip side, far too many people will now start to think that the weaker data means that we could be headed towards another recession. That is just stinkin’ thinkin’ too.

You see, Muddle Through Growth is what best explains what we have gone through the past 3 years…and it continues through this day. +2.7% growth is considered “trend” growth for US GDP. So Muddle Through is less. More like +2%.

At that pace it sometimes feels like you are about to hit a boom…but it doesn’t happen. And it sometimes feels like you are about to go into a recession…but that doesn’t happen either.

In the short run this scenario will create sideways to downward action. But most importantly, until proven otherwise, we are entering our 4th year of Muddle Through Growth. The last 3 years produced a 100% gain for stocks…I can think of worse outcomes 😉

If you are an active trader, then play the swings in near term. If you are a long term investor, then stay focused on the highest probability outcome, which is that the bull run remains intact.

Best,

Steve Reitmeister (aka Reity…pronounced “Righty”)
Executive VP, Zacks Investment Research

Breakout Confirmed

We enjoyed a 2nd straight day firmly above the old highs of 1370 which helps confirm this breakout. The softening of the bond market may help provide the catalyst for the next leg higher.

How’s that?

We are likely near the end of a 30 year bond rally. Meaning rates have been going lower for 30 years making the bond market a safe and profitable haven for investors.

So now with rates bouncing up from historic lows, then bond investors will start losing money for the first time in a LONG TIME. When they look over their shoulder and see stocks making new highs, then naturally bond funds will see outflows and stock funds will see inflows. This fresh money coming into the stock market will help push it up to higher highs.

Best,

Steve Reitmeister (aka Reity… pronounced “Righty”)
Executive VP, Zacks Investment Research

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