Anniversary of Market Bottom
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%.
