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A Time to Lean into the Wind
05/25/2011 1:04 pm EST
Stocks should heat up within a month, as lower gas prices and hiring stoke confidence, writes Bryan Perry of Cash Machine.
As they say on Wall Street, "It's all about the numbers."
Be they economic or company-specific, upbeat economic data and corporate earnings are what drive stocks higher.
Earlier this month, the market got a much-needed lift from the Labor Department, as non-farm private payrolls rose 244,000 in April versus estimates of 186,000, a big upside surprise.
Following a clean technical breakout at 1,340 for the S&P 500, the stock market's benchmark index rallied to 1,370. Then the correction in commodities forced massive sector rotation, and net selling by highly leveraged funds caught in the downdraft that saw crude oil drop from $114 to $98.50 per barrel during a four-day span.
The correction in oil was necessary to crush the speculators that had artificially bid up prices against a backdrop of fundamental data showing ample global inventories to more than meet current demand.
I expect further price spikes in the weeks and months ahead, as nothing material has changed regarding unrest and political upheaval in the Middle East. It is still one big mess there, and supply interruptions are always a risk.
The investment landscape is positive for high-yield investors:
- Federal Reserve Chairman Ben Bernanke gave the markets confidence during his recent news briefing;
- Labor and housing markets both saw an uptick;
- Gasoline prices are set to decline going into the summer driving season following the selloff in crude;
- Interest rates and core inflation will remain low;
- And business confidence is ratcheting higher, as emerging markets provide strong demand for US goods and services.
Looking ahead, history would tell us to be wary of May and the summer months in general. Stocks tend to drift lower and not higher when light summer volume dominates the tape.
But there are times to be patient, and there are times to lean in. Now is the time to lean in—a period of seasonal weakness following the earnings season.
The most recent pullback and volatile sector rotation suggests we will see the major averages stuck in a range for a while, which is fine and constructive. By the end of the second quarter, I expect the S&P 500 to challenge 1,400 on further confidence in revenue and earnings growth.
The back-and-filling process is never fun, but it is necessary for the market to build a strong base from which to support the long-term uptrend. The choppy month of May should finish better than it began.
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