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. 


Nov 16, 2012 8:57PM

Thank God.CGT hasn't found us yet....If I can only hear the rhetoric one more time before I die..

It was a great day.....

Twinkie took a bullet for Big Bird..

We bought 1 box yesterday...Should have been 10...


Dang it, It is was Obumpa's fault...

Next week probably slow....But wait and see what happens the 10 days after that..

Hope they are not all sleepy from eating Turkey.

Nov 16, 2012 7:19PM
Twinkies will be the new us currency after the crash. Waiting to see that W on the major averages graph. Thanks George W and Obama. I'm hoarding twinkies. Gold is for losers.
Nov 16, 2012 7:17PM

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 7:12PM
Romney may have killed Big Bird but Obama killed the Twinkies!!!!
Nov 16, 2012 7:03PM

If Wall Street is really worried about Obama being re-elected then it can only be because he will go after these rats on Wall Street who have been screwing us on our 401K'S, not any other real reason's.


In fact if Wall Street was so concerned about a president being incompetent as a president then certainly Wall Street should have crashed 100% and gone completely away under George (DUH!) Bush.

Nov 16, 2012 6:55PM
RIG EXPLOSION IN THE GULF - If we get rid of corporate legal personage, justice would be applied to the top executives.  Now with the protection of corporate liability shields and regulations, executives get off the hook while shareholders take financial hits and lower level managers take the fall.

Nov 16, 2012 6:37PM

WFTime....MO is great and not just boring, good div too..IMO

Have about 23-24  into it plus got the PM spin..Both together are Fantastic..

We added shares of both after the spins...

So hold those boring stocks and you can get rich...If you have the time.


As for AGNC and NLY, they are a nice place to park cash for at least a couple more years

They were both up about 4% today....After being beaten down.

Nov 16, 2012 6:34PM
I knew it - I KNEW IT!  I knew the Fed would push a QE4 - and continue to devaluate the dollar - even though Ben Dover Bernanke had said right after QE3 that he wouldn't do it again. The man is incompetent and crooked. The Fed is a failed 'experiment', at best. Can we get rid of it now???
Nov 16, 2012 6:30PM

Corporate profits are at a 18 year high, and you fox watching whacks think by giving them more money they will create more jobs???? HOW???


Jobs are created by the consumer if the consumer has no money to spend no jobs will be created. The job creators are WE THE PEOPLE.

Nov 16, 2012 6:29PM
Ha.....LOM, I took #100 right away from you.....Ha.
Nov 16, 2012 6:26PM
WORKING FULL TIME.......You will do well, those are profit makers and good Div plays
Nov 16, 2012 6:26PM

===HEY EVERYONE, set back, get your unemployment, get your food stamps, get your free celphones, get your free medical care, get your pipe out, and enjoy. More will come when we tax the rich.====



Watch FOX much, LOL.

Nov 16, 2012 6:16PM
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 6:02PM
Hey Guys and Dolls....nice little OIL RIG EXPLOSION in the Gulf again today....

What did I tell you Repubs about the need for rules and regs?  Its not going to
go away.  Industry can never 'self regulate' (that is another myth). 

Note also that some BP peeps were indicted for manslaughter yesterday. 
I guess this is something that can be blamed on Obama as well?

Nov 16, 2012 5:57PM
Another is   MO  and  LINE  ive made great profits on both of those as well
Nov 16, 2012 5:50PM

Hope you are watching NLY and AGNC,.......LOM

We who hesitate, usually lose or don't make as much..?


Nov 16, 2012 5:40PM
I bet the Hostess bakers don't get 99 weeks unemployment.
Nov 16, 2012 5:40PM
Let me see--tax the rich--gee the rich will just sit back and let it happen--you can bet the tax they pay will be passed on and on. the rich will stay rich because they are smart--soon we will be like South chaos
Nov 16, 2012 5:25PM
@ AN EAGLE    Doesnt matter about repub or dem they just keep the sheep in order.
Nov 16, 2012 5:22PM
Workingfulltime, The 1993 Omnibus debt reconciliation act was the perfect solution to our debt crisis, caused by 12 years of runaway Republican spending, after the act we reduced the debt to GDP ratio by 10%, created 22.7 million new jobs, had the longest Bull Market in History, 8 straight years of an average growth rate of 3.88%, the wealthy made billions, millions of poor were brought into the middle class and we had a projected 10 year 5 trillion dollar surplus which would have paid our national debt off. Returning to the fiscal responsibility of the Clinton years as Obama is trying to do, is my vision of fixing the economy, it worked before and it will work again.
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