Last week, the market broke out to a new high. Strong economic releases and excellent earnings paved the way. The news this week is relatively light and I don’t see anything standing in the way of this rally.
Turmoil in the Middle East sparked a sharp one day decline two weeks ago. Those concerns were quickly dismissed and investors snapped up shares Monday and Tuesday. This quick bounce signaled strong demand and stocks rallied to new highs.
As I have been saying, the market can deal with terrorism, wars, and recessions. It cannot deal with a financial crisis. As long as that scenario is off the table, the market will move higher.
Europe formed a new credit facility to fund potential bailouts. It has been well received and debtor nations will be able to borrow from this fund at much lower rates than they can fetch in the open market. This could mean that future PIIGS auctions will be minimal. If the demand for these new Eurobonds dries up, the credit crisis will be back on the front burner. That is not likely to happen for many months.
States will continue to run huge deficits and this will have to be addressed in the next few months. Structural issues are wreaking havoc on state budgets and pensions will have to be cut. This will create a great deal of unrest. Taxes will also rise. In Illinois, residents will be paying 65% more state taxes this year. Other states will have to follow suit.
Stocks are cheap and they have been slow to rally because of credit concerns. Now that those worries have been pacified, investors will pile back into the market. Bullish sentiment is extremely high and it should be. Corporate profits are up 35% year-over-year and the S&P 500 is trading at a forward P/E of 13. If valuations were getting stretched, sellers could flush bullish speculators out. That is not the case and Asset Managers are buying every dip. Consequently, the sell-offs never get started.
This week, I am selling puts on commodity stocks. I am longer-term bearish on retail, but in the short run this sector could see a nice bounce. These stocks ran up on great November sales and they pulled back in December when holiday sales were light. Last week, we learned that same-store sales at department stores were better than expected and consumer spending was up .7%. Retailers will be releasing earnings next week and these stocks have room to run on the upside. In particular, I like some of the specialty apparel companies. I’m also seeing some nice opportunities in technology. Look for stocks that posted great earnings and pulled back on the number.
On any pullback, I will buy in the money call options with the intent of getting in and out in a few days.
This rally will continue to push higher this week. If the price action is nice and steady, we won’t see any declines. However, if the market gets ahead of itself and we see a big rally, profit-taking will set in.