The strength of this bull market continues to defy all bears and most reasonable arguments about why the economy can’t sustain the earnings recovery driven by government stimulus and quantitative easing. But while economists are busy crunching numbers and saying “on the other hand,” there are two groups of people who put their money where their mouth is: portfolio managers and company CEOs.
For portfolio managers, what has been occurring since March of 2009 is still in progress. They are buying the “V-recovery spread” whereby their forecasts for the recovery in earnings off of the recession trough are greater than the pace of P/E multiple expansion. In other words, earnings momentum accelerates faster than P/E’s rise.
For company CEOs—who clearly have a vested interest in the hard details of an economic recovery as it applies to their investment decisions in new equipment, projects, and personnel—what their optimism, or lack of it, says about the future is probably even more important. From John Chambers of Cisco (NASDAQ: CSCO) and Sam Palmisano of IBM (NYSE: IBM) we got early recognition last year of the bottom in corporate IT capital spending.
From Caterpillar (NYSE: CAT) CEO Jim Owens, we got word as early as April of last year about the continuing strength in emerging-markets development, and more recently the same kind of global industrial growth optimism came from Eaton (NYSE: ETN)CEO Sandy Cutler. You can read about their views of the world in Emerging Markets Drive Global Recovery.
Two Mini-Corrections and 75% Later What kind of obstacles has this bull market had to face? Only two corrections hardly worthy of the title, one in June-July and one in January, both barely registering 9% on the scale. Just enough to get bears to pile on and end up driving markets higher when they had to stop the bleeding and admit “this wasn’t it.” Let’s look at the chart now and see where the next obstacle might be.
The market’s current parabolic rise was fueled in part by the length of time the broad averages spent going sideways. The S&P gravitated around the 1,100 mark for nearly four months, as if it were a magnet. And that’s why the Volatility Index (VIX) kept coming down and remains sticky below 20. You can see how the 10- and 20-week moving averages finally caught up to the price action and nearly parked together at 1,100 in late February. Why did this consolidation fuel the current rally above 1,150 to make new highs? Because of pent-up energy, and the doubt and worry of lots of bears. That is the nature of huge, dynamic systems like markets full of unpredictable social variables and events. They are more complex than weather, but often lend themselves to predictions that are just as reliable. We have been predicting the market’s continued rise for over a year now, and we still believe especially after the market held our key support lines (in red) around 1,025 in January’s sovereign-debt inspired slide.
But where will the next pause be? 1,225 is a likely target for a turn-around, not least because it is the site of a very long-term moving average, the 200-week. Many strategists and traders feel that 1,200 will be a short-term (or longer) top with lots of bad memories for those who watched the Lehman implosion and ensuing credit crisis send the market, and their portfolios, off a cliff. But that is too easy and too obvious to predict, and for precisely the reason that so many will be trying to sell that level, it will probably go through it. And it will be propelled further by all the short-covering that coincides with the euphoria of getting above pre-Lehman-shock levels. Last summer, we predicted the market would meet a good amount of selling at the 100-week moving average, which was steaming down at a similar angle as the 200-week, just above 1,100. That prediction also proved correct, as the market kissed it in late October and fell immediately down to 1,030.
So, for now, you can ride the momentum, and the doubt and worry of the bears, all the way up to 1,225. Then the market will have to take another pause and back-and-fill around 1,200 for a few months before it tries 1,300. These levels are not always hard and “magnetic.” But they serve as useful guideposts to price action and give you more “wide-angle” prediction power than a dozen economists with 13 opinions.
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