Top Stories to Reverse the Rally
Whew! What a week. Mid-term elections, quantitative easing, and a fantastic non-farm payroll number this morning.
Rather than dig into the specifics of each of these catalysts, let’s simply look at them in terms of removing uncertainty.
The elections are forcing the administration to make concessions on tax cuts. The Fed has reiterated its commitment to backstopping asset prices. And the payroll numbers show that the economic recovery is starting to add jobs.
Of course, we could look at this glass as half empty. 150,000 jobs a month will not change the unemployment for about, oh, 10 years. There’s no guarantees that a re-configured Congress do the right things. And Bernanke’s plans are fraught with long-term peril.
But the bottom line, for the time being, is that much uncertainty has been lifted from the stock market. That’s why we saw such a nice rally yesterday, and it’s why there is still more to come.
The banks enjoyed a particularly strong rebound yesterday. The relief for the sector was almost palpable. And I don’t think it was a coincidence that the mortgage put-back stories were suddenly replaced by the news that banks may start paying dividends again in 2011.
This goes to a point I’ve made in Daily Profit before about the news flow and investor sentiment. When the news flow gets particularly negative, individual stocks are ripe for the relief rally.
That’s exactly the situation we saw back in August when stocks started the current rally.
But let’s also not forget that the news flow will turn at some point. Right now, it may be all good. But that won’t last.
Oil prices have the potential to raise a warning flag for spending, as household budgets are pressured by prices at the pump.
And of course, a surprise pickup in inflation as measured by the PPI or CPI is another potential catalyst.
We also should pay attention to states’ budgets. Meredith Whitney made some minor headlines with her report about insolvency at certain states. This story is likely still percolating in the background.
I want to emphasize that I don’t expect these stories to pop up in the next day or two. We should see some significant new highs for the indices. And then there’s the holiday season to perpetuate the good cheer. But as we get toward January 1, 2011, the potential for a significant reversal increases.
I want to congratulate TradeMaster Daily Stock Alerts Jason Cimpl for his prescient market call from early September. In the early stages of this rally, he targeted 1,220 in the S&P 500. And he helped his subscribers to 40, 16 and 14 percent along the way. Congrats, Jason and nice call.
Oh and don’t worry, I’ll continue sharing Jason’s insights and targets with Daily Profit readers.
Two weeks ago, it was Treasury Secretary Tim Geithner pressuring China on its currency valuation. Now, it’s China’s turn to pressure the U.S. on the Fed’s easing policy.
It’s a little funny that China tells Geithner to mind his business, but has no problem demanding “…some explanation on their decision on quantitative easing…”
It just goes to show you these discussions are mostly political in nature, designed only to show citizens that their government is handling the big issues.
That said, it will be interesting to see how the G20 meeting in Seoul next week goes.
As always, I want to hear from you. Write me at dailyprofit@wyattresearch.com
