8 Reasons for the Rally to Continue

Keep a cautiously bullish bent in this environment

   

With all major market indices having made significant gains since the start of 2013, are there any more reasons for stocks to go up? The answer, according to one research team at a boutique broker/dealer in New York that does an amazing job of explaining macroeconomic and market trends to the street, is “Yes.”

After all, stocks are making huge gains across all sectors since the start of 2013. In technology, Netflix (NASDAQ:NFLX) has made big moves, having posted gains of more than 100% since the first of the year, Novatel Wireless, Inc. (NASDAQ:NVTL) has shot up more than 47%, Take-Two Interactive Software (NASDAQ:TTWO) is up almost 40%, and Activision Blizzard, Inc (NASDAQ:ATVI) has gained about 35% on the year. Retail stores like Staples, Inc. (NASDAQ:SPLS), Radioshack Corporation (NYSE:RSH) and Office Depot, Inc. (NYSE:ODP) are also higher by as much as 50%.

At present, my source is telling clients that a key reason for the market’s risk-on posture is that the odds that the global economy will experience a “growth scare,” on par with last year or the year before, has significantly declined in the past six weeks. Here’s why, according to the analysts:

  • The worst of the fiscal cliff was averted, house prices are rising and homebuilder sentiment is rising. Payroll employment gains are averaging 200,000 per month and unemployment claims are at a five-year low.
  • Bank loans in January accelerated significantly, sales tax receipts surged in January, Chinese growth is up and Chinese stocks are up sharply (+25% from recent low).
  • “Abenomics,” which is the nickname for the new Japanese fiscal and monetary efforts, are a new positive for global growth.
  • The Wilshire Composite, the broadest measure of all U.S. stocks, has broken over its 2007 peak. The Russell 3000 (INDEX:RUA), which combines the Russell 1000 large-caps with the Russell 2000 small-caps, rose to a new all-time closing high last week. (Remember the old saying: There’s nothing more bullish than a new high, except the last one.)
  • U.S. oil exports in December surged while oil imports declined. The U.S. budget deficit has narrowed from -10% of GDP to -6%.
  • QE3 does not have a cliff date. Unlike prior quantitative easing efforts, it is open-ended and will continue until the country’s expansion is on solid ground.
  • Housing and employment are strengthening simultaneously. State and local employment is on track to increase because state tax receipts for January have surged.
  • All major U.S. budget issues could be behind us by May.

That’s all well and good but what could go wrong on a fundamental level? Plenty.

Gasoline prices could continue to surge, cutting into consumer incomes. Chinese food prices could continue to surge, potentially leading the People’s Bank of China to reduce stimulus. The eurozone crisis could flare up again in a big way, as it has started to do in the past few days. And here at home, the sequester, or automatic Pentagon and discretionary government spending cuts, could cut as much as 1% off U.S. GDP if it goes through as is.

The bottom line is that investors are more confident and stock supply is shrinking at the same time that there is a lot less to worry about now than last year or the year before, so real economic growth might have a shot at getting traction finally. “Less” is not the same as “none,” however, and we still need to be vigilant for dangers on the horizon.

The best case scenario would be a pause or correction in stock prices over the next month and a half that injects a measure of fear back into investors, followed by a renewal of risk-on mode in April, once first-quarter 2013 earnings prove that companies are still finding ways to boost their earnings in a low growth environment.

InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage which aims to capture profits of 15% to 40% and often as much at 100% to 200% in less than 90 days. 

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