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 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 4:00PM
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It`s up, up, and away for stocks.We got the nervous nellies out of the market.Many people shouldn`t be

in the market.Just stay in CD`s and be thrilled to get 1%.I`ve been buying big time this week.Thanks

Wall Street for shaking out the amatures who bellyache about the elections.

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 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 3:52PM
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What the H is he talking about?  He definitely needs another "dose" of himself.  It must have taken him days to write this nonsense.  Chart this...the economy is not going to recover and has never been in any semblance of recovery now for years.  Let's have a war and put people to work...it is right around the corner and this blase BS is just hope and promise.  You "kids" are just wanting something anything to keep your nonsense going with charts and other BS. You will grow up very quickly if I do not my guess. You asked for it and you now have it.  I will leave it at that.  Mattresses and gardens now as you are about out time "churning"...you had to know this would happen unless your "charts" forgave you for being stupid in reliance......
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 3:42PM
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Alright...what did Obama say during the budget talks that put the market in the red today?
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.
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