STRATEGIES

Friday's sharp rally probably wasn't enough to reverse the negative short-term outlook, but the long-term view is still strong, and there are several promising plays for investors who remain alert and use tight stops, writes MoneyShow's Tom Aspray.

For the first time since May, the monthly jobs report did not disappoint the stock market, as it surged to new rally highs in reaction to the best job growth in some time. The overall unemployment rate actually rose, but that did not stop the buying and the short covering.

The Spyder Trust (SPY) had its best day in quite some time, gaining 2%. The S&P 500 is now not far below the widely watched 1,400 level, and the Dow Industrials has settled well above 13,000.

However, even these impressive gains were not enough to turn the technical outlook positive. The market internals, like the Advance/Decline lines, are still lagging the price action. In my experience, the majority of strongly trending moves in the stock market are characterized by the market internals leading prices, not lagging them.

Last week, I took a slightly more cautious outlook on the stock market, as I dropped to about 55% invested with the other 45% in cash. As I discuss in more detail later, I will be ready to move to a more fully invested position once the outlook for stocks turns more positive.

Investing in stocks got a bit more attention this week, with the bond king, Bill Gross, and Professor Jeremy Siegel facing off on the wisdom of investing in stocks. Bill expects stocks to return just 4% in the near future, a bit lower than his October 2009 forecast for 5% growth.

Clearly, the 2009 forecast was way off, as the Spyder Trust (SPY) is up over 36% since November 2009. Of course, no one can dispute Bill’s brilliance or success, as one of his funds brought in over $2 billion last month.

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My approach to the markets also does not fit well with Professor Siegel's. His long-term forecasts for Dow 15,000 earlier this year coincided nicely with an interim high. Though it may get there, I tend to look at the stock market one step at a time.

The long-term performance of the S&P 500 with dividends can not be ignored. The chart (from www.simplestockinvesting.com) shows that $1 invested in the S&P 500 in 1950 grew to $500 in 2010 when dividends were reinvested (orange line). This compares with a value of just $60 without dividends reinvested (blue line).

Regular readers will not be surprised that I do not agree with the dismal outlook for stock investing. My approach is to select the strongest stocks in the strongest sectors with the most positive volume patterns. When yields on stocks are greater than those of bonds, as they are now, I look for those with attractive yields.

Combining the relative performance or RS analysis with market timing can be quite effective in boosting your returns in the stock market. At MoneyShow.com, you can find my columns going back to 2008, so you can take a look and judge for yourself

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This year has seen quite a few wide swings in three of the main asset classes, gold (GLD), bonds (TLT), and stocks (SPY).

GLD was up over 14% early in the year, but by early in the summer had given up those gains. Bonds as represented by TLT were down 9.5% in March, but up over 9% just a few weeks ago. Stocks have been positive since the beginning of the year, peaking at over 13% in early April. With Friday’s gain, stocks have once again taken over leadership.

Last week, the markets were buffeted by economic data and came out intact. The FOMC disappointed some by taking no new action after their meeting concluded last Wednesday, and on Thursday the ECB left rates unchanged.

There was more good news on housing, as the S&P Case-Shiller housing price index revealed that housing prices rose in all 20 districts that they covered. Consumer sentiment from the Conference Board also rose to its best reading since April.

This week we have a fairly light economic calendar, though Ben Bernanke is speaking on Monday and Tuesday. The latest data on productivity and costs are out on Wednesday, with international trade numbers and jobless claims on Thursday. Then on Friday, we get the import and export prices.

This light calendar suggests that any market moving news is likely to come from overseas.

NEXT: What To Watch

Tickers Mentioned: SPY, DIA, QQQ, IWM, GLD