Are stocks headed to new highs?
After 2 months in the doldrums, here's why the market is poised for a breakout.
How's this for a surprise: Despite ongoing problems and political bickering in Europe, despite the specter of the fiscal cliff here at home, despite investor pessimism and despite a too-close-to-call presidential election, stocks are on their way to new highs.
The bulls have been unable to decisively break through the 1,470 level in the S&P 500 over the past two months for the reasons mentioned above. But with the economic data surprising to the upside and Q3 earnings not as bad as many analysts had expected, I think they have the firepower to clear it and extend to the upside.
As I discussed Wednesday, in the context of higher oil prices, a big breakdown in the U.S. dollar is under way as Europe moves closer to activating the European Central Bank's new bond-buying program and giving Greece its next installment of bailout cash. The decline in the greenback is critical, since leveraged hedge fund types key off of the dollar for decisions things like commodities, foreign stocks and crude oil.
Since trades are funded in dollars (by selling the currency short and using the proceeds to speculate), a weaker currency bolsters the returns of the total trade. So as long as the dollar is falling, stocks and the entire risk-on trade should move higher.
Also, I'm seeing significant rotation into cyclical, economically sensitive stocks in areas like materials, energy and foreign issues. A perfect example is the action in steelmakers, an industry group that has been left for dead for much of the year on global economic slowdown concerns and worries about the pace of growth in China. Merrill Lynch economists believe last night's 7.4% Q3 Chinese GDP reading marks a trough in the pace of growth before things re-accelerate.
In their words: "We have been seeing an increasing amount of evidence of green shoots from a wide range of sectors including transportation, commodity, exports, property market, credit and money data, tourism in Golden Week and manufactures' restocking."
Thus it's not surprising to see the group perking up now, especially when the likes of Nucor (NUE) have managed the downturn in steel demand better than analysts had expected.
And finally, technical measures of market strength -- such as breadth -- are bouncing back strongly as buyers, who are moving rapidly from fear to greed on the emotional spectrum, aggressively snap up a broad swath of the market.
I'm recommending my newsletter subscribers and money management clients get in on the action via holdings like Mechel Steel (MTL), Market Vectors Steel (SLX) and Seadrill (SDRL) -- all three of which have been added to my Edge Letter Sample Portfolio.
Disclosure: Anthony has recommended MTL, SLX, and SDRL to his clients.
I found all three positions with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)
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.
When are idiots going to stop blaming the President,any president for high gas prices?
why not get a more fuel saving car or thruk/If you`re driving a gas guzzler you have
nobody to blame but yourself.
"We are sinking in a swamp of recession and it's getting worse," said Dimitris Asimakopoulos, head of the GSEVEE small business and industry association. "180,000 businesses are on the brink and 70,000 of them are expected to close in the next few months.""
YUP..let's keep giving moneyto bailout Greece, Spain, Italy etc. When will we ever learn? Say what you want Anthony but the only way the stock market will reach new highs in the next two months is if our government pushes the right buttons to make it happen. This market is rigged, manipulated and based on lies and that is why it is where it is. Even when there is negative news like a surge in the unemployment numbers the market does not react negatively. However..if the unemployment numbers were to drop even slightly the market would surge. Didn't we just hear how the unemployment had dropped to 7.8%? It a LIE...it is closer to 15% but nobody cares to report the truth. All the various consumer confidence surveys are nothing more than bullsh*t and if you dig deep and find out how they conduct the survey you will understand why. We are so quick to focus on the number of jobs created each month but why isn't their a report that details how many jobs were eliminated and people were let go? The government and the media who is controlled by our government will not report the truth or anything that may reveal that the economy is not as rosy as they would like people to believe. That is the TRUTH!!
Romne's 'Let GM go Bankrupt' bit him in the butt.
Sad to see Romney flip flop so much so often on most topics.....he has major character flaws....
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These companies won't soar like other plays in the sector, but they make for great income sources.
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