(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
As stated, again and again, there is little reason to be bearish these days. The low rate environment creates a low hurdle to find stocks the most attractive investment option. Ladle on top of that improving economic and earnings data and you understand why stocks are finally making the long awaited move up to 4,000.
This is barely a matter of “IF” it will happen. At this stage just a matter of “WHEN”.
I would bet it happens by end of February given that we are only talking about a 2.5% move from current levels. Yet it wouldn’t shock me if it happens sooner than that.
Helping the bullish cause is a clean slate of positive economic reports last week. Here is the quick rundown.
Monday we got a very impressive ISM Manufacturing report coming in at 58.7. The forward looking New Orders reading was a notch higher at 61.1. Remember that anything above 55 is considered excellent.
Then on Wednesday we got the related, ISM Services report, rolling higher to 58.7 with New Orders at 61.8. Plus there was a big leap for the employment reading at 55.2 vs. an anemic 48.7 last month. This corresponds with employment gains found in ISM Manufacturing.
Speaking of employment ADP Employment came in well ahead of 50K jobs added estimate with +174K. The Government’s Employment Situation on Friday was not as sparkling as ADP, but the 49K jobs added was well ahead of last month’s unwelcome -227K jobs lost.
History has shown me that the ADP report is actually more accurate in telling the trend for employment. Yes, the Government version gets a lot more fanfare in the media. However, I am certain it is not a surprise to you that a for-profit company does a better job than the government at measuring, well, just about anything. Meaning that the improvements found in the ADP is more likely the correct reading of the employment trends.
My confidence in that statement only grows when you couple it with the improvements found in the weekly Jobless Claims. On Thursday we discovered that it headed lower for the 3rd straight week. In that time we went from a peak of 927K jobs lost to 779K. Still high in the grand scheme of things, but the trajectory is heading in the right direction.
Above is some pretty good fundamental reasons for stocks to run higher. However, there is also a pretty big roadblock up ahead when we reach 4,000. That’s because every thousand handle for the S&P has proven to be a point of serious resistance.
The 3 most likely outcomes after we hit 4,000 are as follows:
Consolidation: This is where stocks struggle to get above 4,000 for a while. However, they never fall that far below 4,000 as there is no serious reason for a larger sell off. We saw similar action as we consolidated under 3,800 for the majority of January where every sell off was quickly followed by a bounce.
Consolidation periods also go hand in hand with sector rotations period. So the overall market average may show little movement, but under the surface may be more meaningful price action as each group takes turns seeing profit taking followed by ample bounce.
The game plan here is to see past the short term volatility to the long term bullish landscape that lies ahead. Meaning you should hold on to your favorite stocks no matter how much they get shook around during the sector rotation.
Pullback: The classic pullback is a 3 to 5% haircut for the overall market. That would mean a retreat to as low as 3,800. Not a very scary proposition is it?
So in this case, you take profits on stocks where valuation is starting to get a bit stretched. Then reallocate to better value propositions on the market dip.
Immediate Breakout Above 4,000: This is the least likely option given the history of how investors have reacted at 1,000 and 2,000 and 3,000 for the S&P. But there are some serious bullish spirits at play these days especially as so many individual investors have come back to the market. That might mean that hitting 4,000 is more like a green light to just keep racing higher.
Again, I highly doubt this option, but it cannot be discounted out of hand. Obviously if this were to happen then you just keep riding the stocks in favor up to that point.
Gladly many of them are in the Reitmeister Total Return portfolio. More details on that in the following section.
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SPY shares were trading at $389.12 per share on Wednesday afternoon, down $1.13 (-0.29%). Year-to-date, SPY has gained 4.08%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More…
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