Yes, Investors, There Is a Santa Claus

12/06/2010 12:14 pm EST

Focus: MARKETS

Jon Markman

Editor, Trader's Advantage

Jon Markman, editor of Trader’s Advantage, sees few obstacles to further gains by the riskiest equities.

Stocks shrugged off another weak unemployment report Friday, just as they did, oh, about 15 times in the past 15 months. It amazes me that anyone thinks these payroll reports are meaningful anymore.

I have decided to stop forecasting these reports. It's pointless from a stock market perspective. The calculation method is breathtaking in its complexity and is seasonally adjusted in a way that sends most statistics PhDs running through the streets screaming.

No Jobs, No Problem
We already know that employment is weak and is likely to remain in the doldrums for months, if not the next year. That is why the Federal Reserve is providing so much monetary support, and why the government is on the verge of extending the Bush-era tax cuts. So to the extent that the employment numbers remain bad, the central bank continues to put out the spiked punchbowl.

And remember that the longer employment remains subdued, the more companies can increase productivity. So in a twisted way, although we grieve as citizens for the people who cannot find work, as investors we see the potential for higher earnings come the January reporting season.

Bears certainly tried to knock the market down on the news, but as we have seen repeatedly since the European Union decided to commit Ireland to four years of house arrest due to its bad debts, bulls managed to punch back effectively.

Bears in Disorderly Retreat
Now we have a situation where this rise of prices has stunned the bears. Their thinking was that the raid on Irish credit after the EU bailout would have had the same effect on equities as their post-bailout raid on Greece. That was the May to June wipeout, in case you have forgotten.

Instead, bulls have decided that European, Japanese, and US banking authorities are on top of the situation better this time. They may not have a permanent fix, but it's good enough for now.

As a result, bears were set back on their heels and in the last half hour of Friday’s trading were really sent packing. If the bulls can keep the Standard & Poor’s 500 index above the 1,200 level for the next week, bears will cover the remainder of their shorts of credit and equities and bulls will have a clear path back above the November and April tops—pointed at 1,250 and beyond.

A short squeeze of that nature, should it occur, would be explosive. Just the idea that it could happen should be enough to make us want to stay firmly focused on higher-beta [more volatile and higher-risk] positions in technology, agriculture, retail, and energy.

A Triple Shot of Ben’s Red Bull
Michael Belkin, an independent analyst who has done a great job calling the ups and downs of the market for the past three decades, sent me a note last week that said this: For US markets, the most pertinent factor continues to be the Fed's credit expansion, which is starting to kick in with a vengeance. Fed credit jumped by $31.3 billion last week. It is suddenly growing at a 7.8% annualized rate. The Fed typically does a seasonal credit add job starting about now to grease the skids for the holiday shopping season.

So adding more for QE2, we can expect abundant, bubbly credit conditions for at least the next five weeks. We should expect that to support the equity market like a triple shot of Red Bull with an adrenaline kicker. This is a good time to stay positive, even if you are cynical about the government's actions and motivations.

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