Can stocks rally from here?

After an extreme post-election slide, signs of strength are emerging.

By Anthony Mirhaydari Nov 16, 2012 3:08PM

Stock market copyright Zurbar, age fotostockIt's no secret that Wall Street wasn't happy about President Obama winning a second term last week. Stocks have been in a violent and relentless selloff since then, with the S&P 500 index slicing through support at 1,400 and at its 200-day moving average like they weren't even there. And as a result, on some measures we're looking at the deepest oversold condition since the bear market ended in March 2009.

 

Popular stocks like Apple (AAPL) and high-yield bonds have been absolutely pummeled as investors yank their cash on fears about the $720 billion "fiscal cliff" of tax hikes and spending cuts, the unresolved Greek bailout situation, growing labor unrest and a new recession in the Eurozone, fresh violence in Israel, and signs that the U.S. economy here at home is stalling.

 

But I have been and continue to be a buyer, as I believe that the downtrend, since the September market high, has nearly run its course. Here's why: 

 

 

For one, Friday's fiscal cliff negotiations in Washington went smoother than many were expecting. Both Republicans and Democrats seem to be moving towards a temporary fiscal cliff extension that will give lawmakers more time in 2013 to hammer out tough decisions on taxes and entitlement reforms. This will give the market a reprieve during the holiday season, a historically strong period for stocks.

 

Secondly, Greece has already taken tough action on passing its austerity-filled 2013 budget despite violent protests in Athens. And much of the holdup in getting the country its next bailout payment, as its cash reserves dwindle, focus on "extra" support via items like a two-year extension of its bailout, lower interest rates, and a possible writeoff of debt it owes other eurozone countries. The eurozone will hold another meeting early next week during which more details on these efforts will likely be released.

 

Thirdly, this week we got plenty of indications the Federal Reserve is preparing another round of monetary policy stimulus at its December meeting, which is just a few weeks away. A "QE4" initiative of around $45 billion-a-month in Treasury bond purchases looks likely, as it would maintain the current pace of $85 billion-a-month in overall asset purchases.

 

A QE4 would replace the "Operation Twist" initiative that's been running since late last year that has the Fed selling its short-term bond holdings and buying long-term bonds in an effort to reduce mortgage rates. And a QE4 would be more aggressive than Operation Twist since it would involve the creation of new money rather than simply reallocating the Fed's existing holdings.

 

And finally, a variety of technical and sentiment measures are at extreme lows, suggesting we're on the cusp of at least a short-term, short-covering rebound in stocks and other risky assets.

 

By one measure, the selling pressure has reached a level not seen since the March 2009 bear market low. The folks at Sundial Capital Research track what's known as a price oscillator, which measures where the S&P 500 and Nasdaq 100 close the day relative to where they opened and their intra-day range.

 

Weak markets tend to sink near the end of trading as major brokerages make their moves. When this happens consistently, as it has since the September market high, the price oscillator drops hard.

 

Using a big picture view of the indicator with a three-month moving average, the measure has moved into the bottom 8% of all readings over the past 20 years and the lowest since the bear market low.

 

What's scary is that these readings often occur during protracted downturns before a short-lived rebound.

 

That's my rough outline of what to expect over the next few months: A powerful short-covering rebound on QE4 from the Fed and a fiscal cliff extension from Washington before the real nastiness starts in the spring.

 

One more factoid from Sundial: This is the seventh time since 1950 that the S&P 500 has sunk to a three-month low in the week before Thanksgiving. After the six others, from Thanksgiving through the end of the year, the S&P 500 was positive five times returning +3.8%, +13.0%, -2.2%, +10.8%, +2.1% and +1.7%.

 

Let's not discount the power of holiday cheer.

 

Indeed, I'm starting to see action in commodity inflation hedges like gasoline, crude oil, silver, as well as key energy stocks like Cameron (CAM), Valero (VLO), and Tesoro (TSO). I'm adding all three to my Edge Letter Sample Portfolio.

 

Disclosure: Anthony has recommended CAM, VLO, and TSO, to his clients.

 

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below. 


 

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145Comments
Nov 16, 2012 3:48PM
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Missiles flying in the middle east, retailers contradicting pre-election consumer spending forecasts, looming Obamacare layoffs on horizon, fiscal cliff, embassy cover ups showing the depth of lies by the administration, growing deficits, and strangling energy prices doesn't add up to a convincing case for a rally.
Nov 16, 2012 3:52PM
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Enjoy the next 4 years of stagnation.  Romney wanted to create jobs, but it appears that the majority of Americans aren't interested.  At least we will get somewhat accurate economic numbers from the mainstream media now that the election is behind us.
Nov 16, 2012 4:42PM
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As long as they can print money the con will go on...
Nov 16, 2012 4:05PM
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Brian, Obama does not need to say anything in order for the market to go down.  He just needed to be reelected.  Of course his finger waging, threats, and "my way or the highway" stuff never hurts. 

 

It is like day-sa-voo (spelling?), He annouces that he will hold meeting with Republicans (wow what a guy), tell Rep to screwwww themselves behind closed doors, then blame Rep.  Then slip up and say something like "I don't care if Republicans come along for the ride they just need to ride in the back of the bus".  Of course this is followed by "there is no blue American, there is no red America .... "  Wow what guy!

 

Then we wonder why people with money are running for the hills.  And the liberal continue to think the rich will stand still while they are stealen from.  Argentina here we come.  STupid is as stupid does.  Read Altas Shrugged.

Nov 16, 2012 3:31PM
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It all depends on the Twinkie Crisis? If we avoid the Fiscal Cliff and Twinkies go up we'll be OK.
Nov 16, 2012 3:57PM
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Sheesh, even Boehner is confident things will work out.  There's a shocker for you.  Makes you want to walk off the job at Walmart and hire on with Hostess.

 

 

Nov 16, 2012 3:56PM
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No WAY the market will still drop. Even if all the taxes go up it will still drop. SOME WAY THEY HAVE TO GET PEOPE OFF THE WELLFARE ROLES AND GET SOME TIPE OF JOBS.
Nov 16, 2012 4:54PM
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If you taxed the rich 100% it still wouldnt put a dent in are budget debt. Do your homework to see for yourself. Why your at it take a look at your chances of retiring
Nov 16, 2012 5:17PM
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The key to being rich is knowing the future and planning around it to make money. Doesnt matter which way it goes theres money to be made on either side.
Nov 16, 2012 5:02PM
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Emptychair

Educated states?  You mean --- "college educated"?

Sorry - 80% of college graduates are not educated, were conned into debt at state universities (institutions for unemployable administrators and staff) and have big problems with common sense.

Nov 16, 2012 4:48PM
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You cant have a recovery with out jobs. And when more people are getting food stamps then ever before and the tax hikes that will be kicking in soon I just dont see a recovery. Please tell me where the recovery is coming from ?
Nov 16, 2012 4:45PM
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Wonder how much tax payer dollars its taking to make this thing go green today?
Nov 16, 2012 4:11PM
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jUST TRYING TO MAKE A LIVING...Buying a few good companies and some gold...

 

Gotta supplement retirement somehow....?

Don't think the Republicans or the Obama Administration, want's the blood on their hands..

They gotta do something now....AND THEY WILL;  re-Toggy 2012

Nov 16, 2012 5:12PM
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I think max would like to tax all the rich until they all take their money overseas.
Nov 16, 2012 7:17PM
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"JOB CREATOR"

Beware of anyone who feels it necessary to keep "reminding" you of who and what they are.

Because if they are really what they proclaim to be... they wouldn't have to keep reminding you.

Nov 16, 2012 6:16PM
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All political and economic developments exist in an ecosystem analogous to that of plants.

The seeds and life of all sorts of change are always present.  The environment always changes in ways that favor one life form over another.

The seeds and green shoots of fascism, libertarianism, totalitarianism, socialism, etc are ever present and grow according to conditions.  Capitalism and markets are omnipresent like air and water regardless of which form of governance takes root.  You can be helped or hurt by them depending on the kind and amount of governance you engage.

Nov 16, 2012 5:40PM
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I bet the Hostess bakers don't get 99 weeks unemployment.
Nov 16, 2012 5:17PM
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"where would you start to fix the economy?" (Spelling fixed)

When there are no more billionaires, we might have a really nice economy. When ever inheritor redistributes it to those in the village that made their ancestor great... we might have a really nice economy. When there is separation and segregation in finance politics law and administration, we might have a really nice economy. When you are being sworn in and can recite all the laws we will obey in Office before accepting the role, we might have a really nice economy. When wealth steps down instead of making up wars to step up, we might have a really nice economy. When banks are allowed to fail and bankers go to jail, we might have a really nice economy.
Nov 16, 2012 7:12PM
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Romney may have killed Big Bird but Obama killed the Twinkies!!!!
Nov 16, 2012 5:25PM
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@ AN EAGLE    Doesnt matter about repub or dem they just keep the sheep in order.
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