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Today marks the two -year anniversary of the stock
market bottom after the financial crisis. I had to go back and check the
Daily Profit archives to find my take at the
time.
On March 9 I said “We’ve been seeing signs of a
rally for a couple weeks now. That’s why I recommended taking a few
positions in select stocks.” One of those stocks was SXC Health Solutions
(Nasdaq:SXCI). It’s rallied from a split-adjusted $10 a share to around
$50.
*****Interestingly, some prominent strategists
like Laszlo Birinyi, Bartion Biggs and Ken Fisher remain bullish on the
economic recovery and the stock market.
We have noted here in Daily
Profit that stock valuations have not gotten out of hand and,
even though we are experiencing some correction/consolidation, the upside
story has not played out yet.
*****I’d like to think that we have identified the
potential threats to economic growth. China‘s need to ratchet up its
fight to control inflation is one. The end of economic stimulus (QE2) and
the potential effect on spending that austerity measures would have is
another.
Sustained higher prices for oil could soak up
enough discretionary spending to impact growth. It’s pretty well known
that virtually all post-World War 2 recessions have started with a spike
in oil prices.
Of course, if the Fed is forced to raise interest
rates before the U.S. economy becomes self-sustaining, that could be problematic as
well. And ironically, it could be strength in the housing market that
forces the Fed’s hand.
Right now, housing prices are one of the main
reasons that inflation measures like the Consumer Price Index
(CPI)
continue that show that inflation is within acceptable norms.
But if the housing market improves, and housing
prices start to rise, we will certainly see a “surprise” jump in
inflation as measured by the CPI.
Now, any strength in housing is likely a ways off.
There’s a lot of “shadow” inventory in the form of foreclosures that will
be hitting the market. I understand that FHA foreclosures from Fannie Mae
will be increasingly going back on the market this Spring. And that will
likely keep housing prices in check for the foreseeable future.
*****For the immediate future, the situation in
the Middle East, particularly Libya, is the catalyst to watch.
Any resolution to the conflict in Libya is likely to send oil
prices lower and stock prices higher.
And with the U.S. and European governments
exploring such measures as no-fly zones over Libya, we may be getting closer
to the end of Gaddafi’s reign in Libya.
*****The stock market has been in correction mode
since February 22. But this correction is looking more like consolidation
every day. And the difference is important.
A correction is a sell-off that likely takes at
least 10% off of stock prices, making valuations more attractive. A
consolidation, on the other hand, takes the form of a stagnant sideways
market. Both conditions serve to work off overbought conditions and give
new money an opportunity to get into stocks.
The S&P 500 has been trading between support
at 1,301 and resistance at 1,335 for nearly 3 weeks. And there have been
plenty of catalysts to drive stocks lower during that time, like
inflation or higher oil prices.
But stocks have been resilient.
Downside risk remains, no doubt. But every day
stocks fail to move below support, the stronger they appear.
*****We are about a month away from First Quarter
earnings (Alcoa (NYSE:AA) reports on April 11). The forward P/E for the
S&P 500 currently sits at 13.75, according to the Wall Street
Journal. Another solid quarter for earnings could move the S&P
500 higher 5% to 10%.