Can stocks rally from here?
After an extreme post-election slide, signs of strength are emerging.
It'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 firstname.lastname@example.org and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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.
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.
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.
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
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.
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.
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.
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With the universe of this category in its seasonal sweet spot, these picks have tailwinds propelling them into the new year.
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