Stocks set to rally for 4 reasons:
- Positive earnings surprises
- Presidential and 4th quarter cycles
- Current market action is bullish
- Market sentiment screams buy
Things are finally in our favor. Recent stock market action mixed with rich American history and sprinkled with a big dose of disbelief is setting the stage for a 4th quarter relief rally.
The key for the stock market always comes down to earnings. For the last few years we have had consistent positive earnings “surprises” in every quarter. That, coupled with the fact that earnings expectations have been lowered so dramatically for this upcoming quarter, stocks and bonds are setup for rally mode.
2. Quarter and Presidential Cycles:
- In the last 30 years, stocks rise more than 75% of the time in Q4 with an average return of about 8%.
- The 3rd year of a presidential cycle, which we are in in case you haven’t noticed, typically brings an average return of almost 18%.
Although exceptions are always possible and things have been somewhat skewed (or as some feel screwed) here of late with all the government intervention. The 2007-2009 bear market began in the third year of the Bush administration and continued down through the fourth year, and the market has been up quite strongly for the first two years of the Obama administration.
3. Stock Market Action:
The recent stock market has been very encouraging. Tuesday October 4, was a major turnaround day. As I posted that day on our blog, The Market Breaks Key Support, I said we needed a quick reversal back above the breakdown level to show a shakeout was complete, or we would have another major leg down, and we got that recovery. Two days later in my weekly Smart Money Newsletter, The Futures So Bright, I Gotta Wear Shades, I made the call for a rally from here, and I am keeping that forecast.
Yesterday’s move brought us to the top of the trading range so the next few days will tell the story. A strong move higher on continued strong demand and volume, will be a positive for the market. The key here, though is more than 1-2 days of rally above the Aug. highs. Just as the break below the early Aug. lows on Oct. 3rd/4th proved short-lived and a trap for overaggressive bears, an apparent breakout could be just as effective as a trap for unwary bulls. The best evidence of a trap would be a surge to new recovery highs on heavy volume that fails to follow through. That would be a so-called “Terminal Up-thrust“, which would indicate the end of the rebound rally and bring us back to the bottom of the Aug.-Sept. trading range.
History is on our side here. Since WWII, when the market dropped over 14% for a quarter, a strong rally ensued 89% of the time. In addition, we have had two very similar cases which occurred after the 2000 and 2007 market peaks, with positive divergences developing after break downs from trading ranges. On December 20, 2000, the S&P 500 broke through the bottom of about a two month trading range and again in mid-March of 2008. Both turned out to be shakeouts with the market reversing quickly after breaking the lows. In these cases, the rallies spanned 26 sessions from the Dec. 2000 low, gaining 8.6% and 44 sessions from the mid-March 2008 low rising 11.7%. Keep in mind however, that although these rallies were considerable, the market ultimately fell back into its primary downtrends, which will very likely happen here as well.
4. Negative Market Sentiment:
This part I love the best. Basically, we’re in a market of can’t, and most feel that it’s obvious that the market has to go down. Well, folks, if it’s obvious, it’s obviously wrong! Nobody feels good about the market right now, plain and simple. In the bigger picture, the economy looks like a wounded beagle. For the longer term, I agree. Things are going to be tough, just like I explain in Facing Goliath: How to Triumph in the Dangerous Market Ahead.
Invest for need, not for greed. If investors simply take advantage of where the “sweet spot” is, while standing ready with a well thought out exit strategy, success will follow. That’s what “tactical” investing is all about, to get the very best returns with the least risk possible, and that’s where we can help…
Our active, hands-on Top-Down Tactical™ investment management strategy for managing portfolios can help you manage risk and deliver returns. If you would like to discuss the market, economy or simply get a free second opinion on your portfolio, call me for a free consultation today at (916)
Regards -Keith Springer
P.S. Don’t forget to tune in to Smart Money with Keith Springer, every Sunday at 4pm on Talk650KSTE.