Are stocks headed to new highs?

After 2 months in the doldrums, here's why the market is poised for a breakout.

By Anthony Mirhaydari Oct 18, 2012 12:59PM

Cory Docken, Spots Illustration, JupiterimagesHow'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 anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

27Comments
Oct 18, 2012 1:30PM
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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.

Oct 18, 2012 3:20PM
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Yes, as long as Helicopter Ben is printing 40B /month.  That's about $500/month/family...  People are using stocks and specie as a safe haven from Ben's printing press....

With a 58% growth in 4 years in M2, you need to make 58% just to keep even with inflation.  That means the stock market would need to hit about 22,000 just to account for the printing press...
Oct 18, 2012 8:48PM
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"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!!

Oct 20, 2012 6:20PM
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now, as for you anthony, i read your articles for info purposes as you are both a prolific writer and quite intelligent.  whenever you pick a market direction i read you for sporting fun and for a few gut-busting laughs.  nice thursday pick of MTL. too funny.

 

the market has run into a series of table-top resistance highs on the upside at 1460 and the global/domestic economics and fundamentals continue to deteriorate.  to actually bet that "stocks are are their way to new highs" in this environment is outlandish, speculative and harmful.

 

no mention of the tremendous risk you are proposing?  we could easily see a 10-20% sell-off in the coming weeks similar to 1987 with many of the same circumstances in place.  wow.  ever heard the phrase "snowball's chance in hell?"

 

anyway ... this was entertaining for the audacity and incredibly poor timing .... remember what happens to complacent investors tony ... pigs and hogs?

Oct 19, 2012 2:59PM
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Nice timing Anthony, right before a huge selloff.
Oct 23, 2012 11:13AM
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MTL down 2.6%, SLX down 3.03% and SDRL down 2.59% - and that is just today!

 

i just don't understand where these preposterous market predictions come from.  is it the need to churn portfolios for profit or just a personality disorder that requires occasional manic decisions? 

 

in the end, the best way to have a day-trader end up with a million dollars is to let him start off the day with two million.  be safe out there and easy does it ....

Oct 23, 2012 1:19PM
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Romney showed his flip flop styles during the last debate on Wars, economy, Rowe vs Wade, women, Russia Iran, Syria. Even said he agrees on international methods setup by Obama.

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....

Oct 20, 2012 6:12PM
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well mg aka "sugar ray", i for one will not use the word "stupid" as i have always found your commentary based on facts and somewhat thought out.  i would, however, feel comfortable using words like: affected, making false assumptions, falsely claiming, naive, deceived, deluded, duped, impersonating (an economist), laying false claim to (such knowledge), letting on, faking, masquerading, misleading or misled, pass oneself off as (informed), professing, pretending, purporting, put up a front (of false pretenses), sham, shuck and jive, simulating, stonewalling, sucker and/or whitewashing, just to name a few.

 

without going into too much detail on the economic theory (as would someone like volker fan (just where has he gone, or floating, or for love of money) it is simply inaccurate (there is another one) to state that there is a high degree of correlation between the increase in money supply and actual inflation.  to pass off as fact that the fed will never reduce the money supply as the economy becomes self-sustaining is simply laughable and false.

 

with that said, it is POSSIBLE (though not PROBABLE) that other unforeseen events and influences may come to bear (maybe a disruption in how the money supply is contracted in the future) that will indeed cause FUTURE inflation or even high inflation or even hyper-inflation, but that is then and this is now.  so, a more prudent approach is to continue a well-allocated, diversified investing approach while appling a tactical approach to periods of equity investing.  if this higher inflation presents itself, then one can always begin to tilt towards those asset classes that will begin to benefit.  to go into this early bunker mentality would be misguided and foolhardy.

 

people are NOT investing much more in stocks as they have been scared out of the market for the most part and remain in other asset classed knocking down 7 to 10 percent annual returns easily (just look at NLY or MWTRX).  it is the traders with additional easy money who have bid up the market - they are taking the risk while passive investors who do remain in the market benefit from the "wealth effect" and begin to spend more.

 

as for leeches, it takes one to know one eh?  saying the 47% "don't pay taxes" is an outright lie.  a prevarication.  a falsehood.  the fact that you continue to repeat and promote this falsehood makes you a serial liar.  the leeches are those who have used up and benefitted from this huge run-up in national debt and now refuse to pay taxes on it.  virtually ALL of the income made by the 47% is spent and winds up as profit back in the hands of the 53% (mostly in the top 2% like yourself) and they refuse to pay taxes which is greedy, "taking," unpatriotic and pathetic.

 

so, stupid? no.  intellectually dishonest? yes.

Oct 20, 2012 6:49AM
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No where to go but up after a selloff!
Oct 18, 2012 2:16PM
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If Romney is elected Gas prices will immediately fall at least $1 per gallon ! Communist obama has intentionally kept gas prices high to support his failed green agenda ! You would have to be a fool not to be able to see this !
Oct 18, 2012 1:35PM
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Thumbs up if the Dow hits 20,000 in 2016 with Obama.
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