Why the S&P 500 will hit 2,000

The market is setting itself up to hit new highs that should last through November.

By InvestorPlace Aug 19, 2014 3:51PM

Caption: Traders work on the floor of the New York Stock Exchange
Credit: © Spencer Platt/Getty ImagesBy Anthony Mirhaydari


Stocks continued to push higher Tuesday in response to a batch of "Goldilocks" economic data.


Consumer price inflation was softer than expected, providing the doves at the Federal Reserve with more ammunition to keep the hawks at bay. And housing looks set to get a lift as new construction starts jumped 8 percent, ending two months of declines.


The broad market looks ready for a Fed-fueled melt-up heading into Chairwoman Janet Yellen's speech on Friday. That likely will set up a push to new highs that should last through November. Helping in this has been the diminishing geopolitical tensions in Ukraine and Iraq.


In fact, after largely skidding sideways over the last few months, the Standard & Poor's 500 Index ($INX) looks set for another move toward the 2,000 mark and new all-time highs. Here's why.

Geopolitics

The main bugaboo that caused the S&P 500 to pull back into the lows seen earlier this month has been the geopolitical situation.


Go back a couple of weeks, and ISIS extremists were on the march in Iraq and Russia looked eager to annex eastern Ukraine. But now, thanks to U.S. airpower, ISIS is on its heels while Moscow seems desperate for a diplomatic, face-saving solution to the conflict between Kiev and pro-Russian separatists.


The rapid cooldown in tensions has pushed Wall Street's "fear gauge" -- the CBOE Volatility Index (VIX), or simply the VIX -- back down to levels not seen since the middle of July.


The VIX is down more than 31 percent from its high earlier in August as options traders have suddenly become more confident that World War III isn't about to start.


The Fed

Another point of concern for the S&P 500 earlier this month was the march of stronger-than-expected economic data -- particularly on jobs and inflation -- that increased pressure on the Federal Reserve to raise its short-term policy rate sooner than the market's comfortable with.


The Fed hasn't hiked rates since 2006, and has kept interest rates near 0 percent since 2008, so any change here was always going to be a big deal.


With payroll gains posting their best winning streak since the 1990s, and with the job openings rate already at the peaks hit during the last economic expansion (job openings as a percentage of the labor force), the market was getting nervous that the Fed was about to take the cheap-money punch bowl away. This fear was magnified by the fact that the Fed's ongoing QE3 bond purchase stimulus is set to end in October.


But recent inflation data has come in rather soft, and with a slight uptick in the unemployment rate last month (as folks reenter the workforce), the doves at the Fed appear to have enough justification to keep interest rates near 0 percent through the middle of 2015.


That's boosting the corporate bond market, which suffered a dramatic pullback in July as chatter over a sooner-than-expected Fed rate hike grew louder. You can see this in the way the SPDR Barclays High Yield Bond ETF (JNK), shown above, has returned to its June-July highs.


The market has risen consistently during the August Jackson Hole conference put on by the Kansas City Fed. And another positive performance is likely given all the dovish media chatter out there about how the key policymakers at the Fed are looking to dial back the perception that the Fed has taken on a more hawkish tone.


Technicals

It's becoming increasingly clear that the lows set earlier this month were enough of an oversold condition for the broad market to rise out of for the next couple of months -- likely until after the midterm elections in early November.


The technical indicators bear this out, with the percentage of S&P 500 stocks in uptrends flashing its first solid buy signal since April (shown above) as more and more stocks turn to the upside. And the stocks-vs.-T-bonds relationship -- which had recently threatened the worst wipeout since 2011 -- has stabilized and looks ready to turn higher from its deepest oversold level since early February.


Sentiment had become fairly depressed and is poised for a rebound. Just consider how penny-stock trading volume -- one of the most speculative areas in the market -- dropped to levels not seen since the last bear market in recent weeks.


November will also likely represent the first month since 2012 to not feature any bond buying purchases from the Federal Reserve as QE3 is wound down. So the lack of liquidity could result in some market turbulence then. But for the next three months, new highs await.


How to play it

There are a number of exciting breakout plays in familiar names in play right now, including beaten-down retailer J.C. Penney (JCP) as it launches explosively up and out of a multimonth consolidation range while its new management team pulls the iconic clothier back from abyss.


Common shares are up 4.1 percent since I recommended them to my Edge clients on Monday, while the September $10 calls I recommended to Edge Pro clients are up 104 percent.


Other opportunities beckon in biotechnology, with stocks like R&D services provider WuXi PharmaTech (WX), which is up 4.1 percent since I recommended it to clients on Friday.


This comes after a number of profitable trades to the downside as stocks bottomed in early August, including a near-350 percent gain in Sprint (S) Aug $8 puts and a 204% gain in ConocoPhilips (COP) Aug $84 puts.


More from InvestorPlace

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended JCP, JCP calls and WX to his clients.

17Comments
Aug 19, 2014 4:06PM
Aug 19, 2014 5:28PM
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The Fed printing $4trillion of fack money in the past 5 years to buy bonds, could this be why?
Aug 19, 2014 4:54PM
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Why don't you check each company's individual earnings report and then see if its share price reflects its current valuation?

If the current valuation is high and its earnings report was disappointing, then you naysayers could be right. Could be bubbling up on QE . . .

Doesn't matter though, turn it into a trade or a day-trade and collect profit on the over-valuation.

Yet right now, companies like Facebook (FB), Starbucks (SBUX) and intel (INTC) had great earnings reports that beat estimates.  They also have plenty of capital on their balance sheets.

Yet their share price has not reflected this reality yet.


Aug 19, 2014 5:00PM
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When it falls and it will he and all his cronies will be telling you, I told you so! This country is in deep ****!!!!
Aug 20, 2014 11:08AM
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I made a bet a few months ago about the S&P reaching the last plateau of 1900...I won.

My bet had been it would go to 19 before dropping to 1750..


Now as it approaches 2000, I will forecast that happening before dropping to 1875....

And now I shall put my Crystal Ball away....I really should get paid for some of this..!!

This shidt is so easy....


And the DOW at 17,000..Easily, many of us have said that by "end of year"; Maybe 17,500 now?


Aug 19, 2014 8:32PM
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Never heard of the Government producing any wealth. The Government takes from the wealth producers and spends it on supposedly needed projects, which in a way is a redistribution of wealth to maybe non wealth creators. Since the Government spends more than the tax take, they borrow from the fed.and spend resulting in excessive inflation, costing the middle class savers a loss in purchasing power in there savings .The middle class, or what is left of it, reduces purchases and companies need financial help which the government provides by keeping interest rates low.  Another attack on the savings of middle class.  Maybe, I don't have this exactly correct, but this how I am affected. Makes gamblers of the citizens via the stock market.
Aug 19, 2014 10:13PM
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So, in other words, the predictor here knows that there won't be any serious trouble in Ukraine, Iraq, Syria, Yemen, etc. etc.  He knows the international markets that affect the USA will remain stable.

In other words, anyone claiming to know the market's short-term future is nothing better than a gypsy fortuneteller.

Aug 20, 2014 8:51AM
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It doesn't matter if or when since it will not stay there very long.
Aug 20, 2014 3:09AM
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All that writing just to predict the S&P 500 will go up just 1% from here? Methinks the lady doth protest too much.
Aug 19, 2014 4:37PM
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Charts and analysis mean NOTHING. If you want to know what "the market" will do, talk to those who manipulate financial markets for a living and ask them their plans for any given day.
Aug 20, 2014 8:38AM
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Most if not all of the International Markets that affect the United States are either bankrupt or approaching Bankruptcy. I would hardly call that stable. , Anyone claiming to know the market's long-term real future is nothing better than a gypsy fortuneteller. We are all just giving out our best guess. However some folks base their guesses on actual Data while others will say anything and everything but Real Data to support their views.
Aug 20, 2014 5:27AM
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It is more likely that Ferguson will play a much larger role in crashing this false economy, than all the drummed up wars around the world. 
Aug 20, 2014 5:25AM
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Someone has to pay for all that QE. With 90 MILLION Americans under and unemployed, confiscating investment accounts and putting a debt obligation there in it's place sounds reasonable and likely. What have you Kool Aid FREAKS been thinking? That free fake money has no strings attached? Not in America. You will owe.
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