Everybody’s got an opinion about the stock market.
That doesn’t make it easy for anyone who listens to anyone else, or worse, listens to everyone else, to get a clear picture about what’s really out there.
Of course, I have an opinion too. And of course, I’m going to tell you what it is.
But first, let me say this about that.
I never start with an opinion. I end up with an opinion, after trying not to have one.
That means I know I don’t know what’s going to happen, so I have to look at what’s really going on. And I get to my opinion by pulling back further and further until I can’t see anything small.
I pull back as far as I can because I want the big picture.
And the big picture is all about the major trend. If you’re on the right side of the major trend, you can’t get killed. You might take a few hits, here and there, but you make money. And while making money is great, it isn’t everything.
There’s something more, something bigger than making money…
It is not losing money, as in, not getting hit so hard that you’re hurting real bad, or that you get killed and are out of the game totally.
That’s never happened to me. I always make money, every year.
It’s not that I don’t have losing trades; I have plenty of those. But I make money because I mostly ride the big trends.
Usually, my losing trades are my more speculative trades, where I try and jump on a smaller counter-trend within the major trend. For example, I see the big trend as positive, so I’m mostly long (I’m buying), but I might think a stock is prone to a sell-off, so I’ll short it. Sometimes that’s a huge winner, but sometimes I will lose on a play that is counter to the trend because the major trend eventually overwhelms everything else.
My point here is this…
The trend is your friend, but within the major trend there can be opportunities riding mini-trends going in the opposite direction. Just don’t get greedy on those plays; the major trend will eventually consume most smaller counter-trending plays.
So, here’s what I see, and here’s my opinion about what I see.
When There’s Money Flowing,
There’s Money to Be Made
The stock market has been on a tear. Which stock market? It almost doesn’t matter. Pick one, any one, in almost any country. Markets everywhere have been on a tear.
But let’s talk specifically about U.S. markets – as in the Dow, the S&P 500, and the Nasdaq Composite.
They’ve certainly been on a tear. The rally since October has been stunning. But it has a somewhat slippery slope feel, in terms of almost being stealth-like, and uninspiring in terms of volume.
We’ve risen so far, so fast, that a lot of investors are shaking their heads and wondering, how the heck did this happen?
So, right now, almost at this very moment, the question is, how did we get here and is this going to last?
My opinion is, yes, this will probably last. The No. 1 reason I think that is because that is the trend, it’s been the trend, and the trend is your friend.
The big picture is all about liquidity. When there’s money flowing, there’s money to be made.
The Fed is keeping interest rates remarkably low and has articulated a low interest rate policy for the foreseeable future. That’s given corporations the ability to retool their balance sheets and do lots of financial engineering. That’s why so many companies are in such good shape right now. That’s a huge positive and not likely to reverse itself any time soon.
Europe was the virus that looked like it was going to make the world sick again. So far, that hasn’t happened. Why hasn’t it? Liquidity, liquidity, and more liquidity.
Just like the Fed pumping money into the U.S. by keeping rates low and by making more and more cash available to banks through its huge quantitative easing moves and “Operation Twist,” the European Central Bank is doing the same thing.
The ECB was buying European sovereign bonds in the secondary markets to try and keep various countries’ interest rates from getting too high. They weren’t that successful. So, in December, they switched gears and lent over 500 banks over 489 billion euros by giving them the money for three years at practically no cost.
They’re going to do another round of that type of term-repo lending on Wednesday. Basically it’s going to be a “come and get it” free-for-all. My guess is the banks will take another 400 billion euros. If they take more than that, it’s because they’re hurting more than we know…
The point is, they’re getting the money so they don’t have to hurt themselves.
China is loosening, too.
Whenever there’s a liquidity party, and a global one at that, and there is no crisis in sight (sure, there’s one in the background, hence the need for the liquidity), then the trend, when it’s up, as it has been since October, should continue.
That’s all I need to know. The trend should continue.
And I’ll continue to mostly play from the long side until the trend changes. Which, of course, it could. But it will take something really major and massively macro to derail this trend.
So, that’s what we look for. We’re on the lookout for an event that could blow up the trend.
A lot of investors are waiting for a pullback because they’ve missed this rally. If we get a correction – and if we do get one it will probably arrive shortly – that’s a good time to not be scared that it’s all over and you’re glad you didn’t buy into this “too far, too fast” rally.
Instead, that’s the time to average down into your good positions. That’s the time to add new positions. If it’s a correction, and the trend continues, you’ll be happy to be in it.
If the correction is a trend-changing event, we’ll know because we’ll see what is causing it. If any correction isn’t caused by a macro trend-changing event, it’s only a correction.
By the way, the Investors Intelligence survey says that 22% of newsletter writers expect a correction, 51% are bullish, and 27% are heavily into the bear camp. All that’s actually bullish for the market.
Right now, the S&P 500 is at 1365.74. Last April, on the 29th, it got to 1363 before falling through early October 2011. It’s up 24.25% since those October lows. If it breaks out higher from here, that’s a very bullish indicator. Heck, it might be on its way to its old record high of 1565.15, which it touched on October 9, 2007.
Dow 13,000? I think it’s here. We’ll see shortly, maybe shortly after we get a correction, if we get one.
And did you see the Nasdaq Composite at 2963.75? That’s its highest close since December 11, 2000.
Global markets have been rallying based on the U.S. economic bounce and our market jumping higher. And the world has the ECB to thank for its open money spigot and staving off a European banking meltdown.
Starting in July, the European Stability Mechanism will essentially layer up to 1.4 trillion to 2 trillion euros into the banking system to help banks finance almost 1.5 trillion euros of bank debt coming due this year. The ECB’s earlier funding and Wednesday’s upcoming round is to offset the 210 billion euros coming due in the first quarter.
Again, there’s trouble out there… but as long as the liquidity spigots are wide open, the trouble should be contained.
Yes, it’s a game of expend and pretend. But if you “fade” it, you already missed this rally, and you could miss the next leg up, too.
As I said, when there’s money flowing, there’s money to be made. And here’s how.
We’re Not Out of the Woods Yet
Greek bondholders had to take a 53.5% write-down, which they say they will do. We’ll see.
Greece will make its 14.5-billion euro payment to creditors on March 20. But its
GDP is expected to fall 4.3% in 2012, which was just lowered from the previously estimated 2.8% hole it was assumed to be digging for itself.
Greek 10-year bonds rose, after last week’s agreement, to 32%. That’s not exactly a vote of confidence in the whole process being successful.
Portugal’s bonds fell, too, increasing the yield from 11.81% to 12.07% on their 10-year paper. Reforms there are being implemented to yield mandated austerity and higher taxes after they got a 78-billion euro bailout based on their promises to fix their own house up. But Portugal’s GDP is forecast to shrink 3.3% in 2012, and even that might be too rosy a picture.
European markets have been on a tear. But Europe isn’t out of the woods. If Europe sinks into a steep recession, we would likely see the trend stop in its tracks and maybe even reverse itself.
Oil prices are another potential trend-stopper. We’ll have to keep an eye on them.
In the meantime, are you long oil stocks? Why not? That trend is up. And until it reverses, it’s worth a play. Just make sure you have your stops in because oil could reverse at any moment. Still, it’s a worthwhile play. I like ConocoPhillips (NYSE:COP), and I especially like its dividend (a 3.50% yield right now).
In my newsletter subscription services – Capital Wave Forecast and The Spin Trader – I’ve been playing from the long side and adding smart, conservative positions. We took some small dollar losses when I put on some counter-trending trades, which just got sucked up by the major trend.
But we’re in rally mode, and I expect we’ll stay here.
All that being said, a correction could be imminent. I and we (my subscribers) will be adding to core positions, averaging down. And we have our stops in place on the positions that we want to exit if the correction is steep.
And if we get a correction and it isn’t just a correction, you’ll know. Why? How? Because I’ll tell you (you’ll know yourself) what’s causing the trend change.
The neat thing is, that after 30 years of playing the markets, I know what I don’t know, which is a whole lot. And I know that if you know the trend, you’ll never get killed, and you will make money every year.