Take Advantage of Strong Sector Rotation. Assets Are Fhifting From Income to Growth

March 16, 2012

Thank you for posting your blog reviews on INVESTIMONIALS. Your comments inspire me to keep blogging. Our McDonalds trade from yesterday is off to a great start! This stock will grind higher. Now you have to do your part. Go buy a Shamrock Shake for St. Patrick’s Day.

The market is making new multi-year highs and the momentum is strong. The news releases are fairly light next week and I don’t see anything standing in the way of this rally.

Sector rotation is very strong. Bonds, dividend stocks and utilities are declining as Asset Managers focus on growth. Financials have been beaten down for a long time and they are rebounding. Homebuilders have also been strong. I believe the next push higher will include transportation stocks and commodity stocks.

Next week, FedEx will announce. It is considered an economic barometer and the guidance will be critical. This could be the “shot in the arm” that the transportation sector needs. Yesterday, railroad stocks jumped higher.

The PPI and CPI were relatively “hot” this week. Energy prices were to blame and commodity stocks are moving higher. I like this sector and I also like cyclicals.

Economic releases from China have been sluggish and we need to see improvement if these laggards are going to catch a bid. The PBOC said it would reduce bank reserve requirements. This easing will stimulate economic growth.

Credit concerns in Europe have subsided and if they flare up, the ECB will launch LTRO3. US banks passed the stress test this week and this dark cloud that has weighed the market down for the last two years has temporarily parted.

Stock valuations are attractive and the S&P 500 is trading at a forward P/E of 14. Investors that were parked in low yielding fixed income products are shifting into equities. This trend will continue and interest rates will creep higher.

Interest rates are at a historic low and I do not see this climb higher as a threat to the rally. This is a very healthy sign and it could actually help the housing market. Potential homeowners have been on the sidelines waiting for lower prices and they will soon realize it doesn’t get any better.

Next Thursday, China’s flash PMI will be released and that is the only significant economic news. It came in above 50 last month and any improvement would be positive.

On the surface, the market will look boring, but the sector rotation is very strong. This is a great time to rely on the Live Update table in the DAILY REPORT. I would start rotating out of stocks that have performed extremely well and I would focus on stocks that are moving off of major support levels on strong volume. As I mentioned earlier, transportation, energy, commodities and heavy equipment are areas I am focusing on.

I’m still keeping my risk exposure fairly low. I’ve had great profits in the last week and I do not want to give those gains back. Today I am taking profits on some of my big winners and I’m trying to scale into laggards. I still feel this rally has more room to run.

Any pullback will set up a great buying opportunity ahead of Q1 earnings. We are only a few weeks away from those releases.

It is option expiration so anything can happen. The market feels like it wants to go higher. Look for a gradual grind higher and steady sector rotation.
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