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

4 Ways to Find Deep Value Stocks Now

The breakout above the old highs at 1370 did not hold on Friday as stocks closed slightly below. But to say the S&P 500 only slinked back -0.3% on the day is not really telling the full story.

You see, Friday was a big “Risk Off” day. (aka Flight to Safety day). That can clearly be seen by the large cap indices barely in the red and bond rates plunging while riskier stocks in the Russell 2000 took at -1.6% thrashing.

Is this something to worry about?

(Insert yawn here)

No. This is just the classic rotation that investors do during a consolidation period. They keep moving their money from group to group searching for outperformance. Some days it’s just industry/sector rotation. But Friday it was safety on and risk off.

The market is still looking for a catalyst to end this rotation nonsense and finally breakout to new highs. This week’s monthly employment reports just might provide the needed impetus. ADP gives us the first set of clues on Wednesday followed by the Government’s on Friday. Given the positive jobs trends of late, I would say the odds are better than 50/50 that stocks will breakout higher next week thanks to these jobs reports.

Best,

Steve Reitmeister (aka Reity)
Executive VP, Zacks Investment Research

Don’t Count Your Chickens Before They’re Hatched

Our friends over in Europe reminded us that a deal is not a deal until it’s signed, sealed and delivered. So with riots in the streets of Greece, politicians resigning and Troika members asking for more austerity… it ain’t a deal yet.

However, I think the deal will get done because they are too close to the end to give up at this point. And that brings us back to the Melt Up scenario for the market I painted for you guys the other day. I just want to elaborate a bit more on that concept.

I believe the market will keep pushing higher to 1400 before we have any correction worth talking about (greater than 3%). This is probably a 6 to 8 week process of slowly trudging our way up to that point.

The biggest battle will be when we hit the old highs at 1370. That hurdle may take a couple weeks to clear. Once above, we should be able to make new highs around 1400. At that point a correction of 5-10% is likely to test investor convictions before making an assault on new highs.

Do I guarantee that outcome?

Of course not. Perfectly timing the market is a near impossibility. The idea is to create a reasonable thesis of what you think will happen. Then place your investments accordingly. And then adjust as need be. So let’s keep tabs on how things evolve and make those adjustments together.

Best,

Steve Reitmeister
Executive VP, Zacks Investment Research