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. 


 

145Comments
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 5:17PM
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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 5:15PM
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THE REPUBLICANS HAVE GOT TO GO !

I don't know about you, but every time I see Boehner, McConnell, Rove, etc, I see no vision and a group who will compromise if necessary to maintain power.

It's time for the true believers in liberty to tie those establishment Republicans down on the bench, get back up to the line and on the next snap grab the face masks and twist to break the necks of these control freak progressives.

Nov 16, 2012 5:15PM
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@ Max  I think your wrong about dillinger. Because all i hear is how the middle class is getting robbed

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 5:10PM
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Are you out of your mind?

Another baseless rally would be an act of war.
Nov 16, 2012 5:04PM
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@ MAX   where would you start to fix the ecomomy ?
Nov 16, 2012 5:03PM
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If you tax the poor at 100% it wont put a dent in the debt. They asked Dillinger why He robbed banks, He Said " Because that's where the money is ", the top 2% own about 80% of the nations wealth, why will taxing the super rich more pay down our debt ? " Because that's where the money is "
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 4:58PM
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Happy Birthday Boehner, now lets start fixing our Nation
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 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 4:42PM
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As long as they can print money the con will go on...
Nov 16, 2012 4:28PM
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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.=====

 

Yes we knew he wanted to create more jobs but the problem it wasn't  in America. 

Nov 16, 2012 4:26PM
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Top Ten Educated States all went for President Obama.

 

Ten worst educated states with the exception of Nevada went for Romney.

Nov 16, 2012 4:21PM
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====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.=====

 

Stop watching FOX half those people you talk about with money voted for President Obama.

Nov 16, 2012 4:17PM
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You are forgiven FACTS&Logic.....A dejavu moment??..... Don't get too excited.
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 4:08PM
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