It’s true that based on a number of metrics, this market is overbought — even in the best stock picks. Price volatility is extremely low. Small options investors are extremely confident, maybe even complacent, while large traders are growing increasingly skittish. I worried about this in a previous blog post.
But on the other hand, there are many positives. We are entering one of the strong periods of seasonality out there — the first quarter of the third year of the presidential term. And breadth is improving, with the cumulative NYSE advance-decline line pushing to new highs. Indeed, despite Thursday’s mid-day losses for the major averages, as I write this advancing issues are outpacing decliners by 200 issues.
Moreover, key leading sectors are starting to perk up again. I’m seeing early signs of strength in semiconductors, transports, and retail stocks again after a long period of underperformance. And emerging market stocks — which tend to lead the U.S. market — are coming back to life thanks to the dollar’s weakness. Here’s what it means, and how to take advantage:
Thanks to the holiday travel and winter weather, a low volume standoff is underway. The bull and the bears are locked in battle — with the Dow Jones Industrial Average closing within a 50 point range over the past week. But that’s set to change soon.
The catalyst will be the December jobs report, which will be released next Friday. So far, we’ve had every sign that the economy is improving — evidence that supports the bull’s case. The only problem, gleefully pointed out by the bears, is that we’ve yet to see a turn in the still terrible job situation.
We’ve already seen a recovery in corporate profits. We’ve seen a recovery in industrial production. We’ve already seen a banking recovery, with loan losses diminishing and new loan origination perking up. We’ve already seen the credit market heal.
And we’ve also had plenty of secondary evidence to suggest a jobs recovery is underway. Today, initial weekly jobless claims plunged to 388,000 — the first sub-400k reading since July 2008. Personal income is up. And payroll withholding tax receipts are up.
But we haven’t seen the employment rate come down meaningfully or significant additions to payrolls. If the December report comes in under expectations — expect a swift and violent decline before the uptrend resumes. If the report just meets expectations or even exceeds them, we could see a quick upward pop that sucks in all the cash on the sidelines like a flash fire exhausting all the oxygen in the room.
I think the more optimistic scenario is likely and recommend investors focus on stocks in sectors groups demonstrating relative strength. In the emerging markets, Brazil, Thailand, and Malaysia all look strong. Related ETFs include the Market Vectors Brazil Small Cap (NYSE: BRF), iShares Thailand (NYSE: THD), and iShares Malaysia (NYSE: EWM). The Semiconductor HOLDRs (NYSE: SMH) and Retail SPDR (NYSE: XRT) are also worth a look.
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