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Yesterday was an interesting day to say the least.
The major indices gapped higher at the open after Congress and the
president reached a compromise that would allow an extension of tax
cuts and jobless benefits. And while I contend this was the right move,
it’s hard to see it as a major catalyst for stock prices.
Sure enough, stocks sold off steadily most of the
day. And the S&P 500 closed slightly below important
support/resistance at 1,225.
Is this a disaster? Are we about to see a
correction for stock prices?
I often defer to Jason Cimpl, my colleague at
Wyatt
Investment Research for such short-term market
direction questions. Jason is the trading strategist for
TradeMaster Daily Stock
Alerts and is very good at determining the
stock market’s next move.
Here’s what Jason told his subscribers this
morning:
I remain bullish, but not because it’s a good
time to buy, it’s because no one is selling. The near term could go
sideways to lower, but by next week SPX could be pushing
1250.
Fund managers are so eager to buy into the
market is because there are no other alternatives. Also, most fund
managers are under allocated and need to keep buying at high prices,
which pushes the market higher, and that causes other managers to buy
at even higher prices, and so on.
Now, Jason has 5 upside positions open at the
moment. And they are all sporting gains as high as 21%. That’s great
work for a holding time of a just a few days.
But Jason’s outlook on the stock market isn’t
exactly wildly bullish. The S&P 500 is currently trading with a
forward P/E of 14.3, according to the Wall Street Journal. I think we
can all agree that’s approximately fair value.
Of course, much depends on the reliability of
forward earnings estimates. Analysts have been under-estimating
earnings since the recovery started. But right now, valuations support
upside for stock prices.
Jason’s observation
that fund managers are under-allocated is useful.
We’ve seen stock prices make a steady march higher since late August.
During the final three weeks of November, the S&P 500 backed off
and met its 50-day moving average, and has bounced higher since the
beginning of December.
Funds are buying, and individual investors have
warmed to the stock market, too. It’s easy to imagine upside for stocks
through the end of the month. But what will happen on January 1?
Will investors book profits to start the year? Or
will they hold in anticipation of a continuation of economic
growth?
If I had to make a guess, I’d look for
profit-taking to start the New Year. But much depends on how stocks
trade the rest of the year.
Technology, oil and financials are the best places
to be right now.
The Bank of Ireland (NYSE:IRE) appears set to break above $3 a share. That’s a pretty good
move from the speculative low entry point around $1.40 I suggested
after the country requested a bailout from the EU. If you took a
position, use a stop loss to manage your position.