Market Provides A Welcome Entry Point

 | Feb 28, 2013 05:07AM ET

For most of 2013 thus far, the market has been on a steady rise without volatility within a narrow channel. Bulls have been looking to recruit reinforcements for their assault on the all-time highs on the S&P 500 large caps and Dow Jones blue chips, after already taking out the all-time highs on the Russell 2000 small caps and S&P 400 mid caps. All they needed was a new entry point to shake out some weak momentum-riders and attract fresh investment capital. Well, it appears they finally got one.

Was that the extent of it? Perhaps. I suspected that the 1500 level on the S&P 500 would be vigorously defended, and it was, despite a brief violation of support.

Now, the technical picture once again is showing stocks poised for continued strength. However, Sabrient's fundamentals-based SectorCast rankings from Tuesday have taken a slightly defensive turn compared with the gradually bullish trend of the past couple of weeks – but overall they remain bullish.

The market has shown some elevated volume and volatility over the past several sessions. It all started last Wednesday when the FOMC minutes hinted that some members thought the bond-buying program should be scaled back sooner than planned. Then Italy’s anti-austerity vote and the perceived negative impact on the eurozone’s recovery from its debt crisis led to Monday’s market plunge, which was the biggest one-day drop since November. But Wednesday’s performance was the best day for the Dow since the first day of the year.

Bulls got some confidence back when Fed Chairman Bernanke made it clear in his Congressional testimony that the money spigot is firmly soldered in the open position, and new economic data showed continued progress (including a surge in “core capex” from the January durable goods report). And as for Italy, they had a successful bond auction which suggested perhaps rates aren’t going to jump radically in response to the election, plus ECB President Draghi reaffirmed his commitment to the eurozone crisis measures.

Over the past several years, the average investor has been forced to learn a new vocabulary. Terms like “collateralized debt obligations,” “sovereign debt,” “quantitative easing,” “fiscal cliff,” and now “sequestration.” And each time a new term is introduced, the media repeats it over and over again until we just can’t stand it anymore. I used to think that sequestration was the isolation of a jury during a trial, but now I’m told that it refers to the automatic across-the-board budget cuts in the event that Congress can’t agree on a Federal budget by Friday.

The sequester is slated to cut Federal spending by $85 billion in fiscal 2013 (which ends on September 30), and there is a lot of fear-mongering going on about the severity and impact of this. But the drag on the economy in 2013 is forecast to be only about 0.5% of GDP, and there are ways Congress can manipulate it through the timing of expense and revenue events.

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I know that a lot of market observers are complaining that incessant Wall Street cheerleading has kept an “irrational” rally in gear. But, to me, the trend is up and there are plenty reasons for it. In fact, this could well be the beginning of a sustained bull run, at least to challenge the all-time highs on the S&P 500 around 1576. The economy is improving, corporate earnings are beating estimates, corporate cash is plentiful, and valuations are still attractive. Although the bull run commenced with the V-bottom off the March 2009 lows, it was more of a relief rally at first as it became evident that we weren’t entering financial system Armageddon. Then, the continuation of the stock rally was driven by quantitative easing programs coupled with a lack of any attractive alternative investments. Now we appear to be entering an actual economic expansion phase.

With over 90% of the S&P 500 companies having reported 4Q earnings results so far, 70% beat expectations, which is well above average. 4Q quarter-over-quarter earnings are projected to show a rise of around 7%, which is above the forecast of 2% at the start of the earnings season and the Q3 growth rate of 2.5%. Analyst consensus says that the Financial sector will continue as the leader.

The S&P500 SPDR Trust (SPY) closed Wednesday at 151.91, which is basically where it was last Wednesday. After the elevated volume and volatility of the past several sessions, oscillators RSI, MACD, and Slow Stochastic have each worked off most of their overbought conditions. SPY seems to have its sights set on reentering the narrow rising bullish channel that had been in place since the New Year. The 150 level appears to have provided the strong support I expected. Lower levels of strong support are shown on the chart, and include the rising 50- and 100-day simple moving averages.