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The Sleeping Bull
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ShareSince I turned strongly bullish on October 5, 2011, and we finally reached my target of S&P 1,350 in February, lots of people have been asking me if the market rally is done.
"Isn't the market tired and topping? Shouldn't we be selling into this resistance at 1,350?"
These may seem like tough questions, as if we are at some grand "inflection" point that you always hear strategists on TV talk about; where we could either go a lot higher, or a lot lower from. Thanks for the awesome coin-flip decision matrix guys.
Don't listen to those guys. I'm here to tell you it's really much simpler than that.
The market is going another 5-10% higher this year and the worst pullback in the first quarter will only be 7% to S&P 1,250. Now that you know that, we can talk about why it's the most likely scenario and what you can do within it.
If you have profits from S&P 1,250 -- which was only 7% ago and might translate into 20% to 40% gains in some stocks you own -- do you need to cash them in?
I say "maybe". It depends on your view of the next leg of this market and on how actively you want to trade. Since I think the market direction will be largely up this year before we get anything worthy of being called a correction (a decline of 10% or more) in the second or third quarter, I still believe the environment is ripe for buying dips. I'll discuss the active trading question in a moment.
Because I am that bullish, I would love a market dip to 1,250 to buy. I wrote a strategy piece on December 22 where I strongly suggested buying the S&P below 1,250 because there was a very good chance (better than 66% in my mind) that we would not see that level again for many months, if not years. I reasoned that before the economy hits escape velocity, the market would.
That was the last day you could buy the market below 1,250.
Virtuous Economic Spirals Really Do Exist
The economy and the stock market have been poised for months to rip the hides off of bears and leave doubters on the sidelines with their jaws dropped open. I'm not saying the S&P is going to roar to new bull market highs above 1,370 next week, as I think it will take several tries to get through 1,350.
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Hidden Bulls for February - Now in Sight
Last December, a new Zacks investor group took aim at quick bull market swings that others rarely see. The goal: Substantial one to 12-week gains. So many wanted in that new members had to be turned away earlier than planned. Only a limited number can take full advantage of this quest for quick profits.
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That said, the momentum is still in the bull camp and I would assign a 33% probability to the idea we do pop through there soon before a major round of profit-taking.
The big message here is that our market is acting well because of these 6 factors...
1) Europe is stable in the ICU
2) China has engineered a soft landing and is about to re-stimulate
3) US economic data is trending positive, from manufacturing and housing to jobs and consumer confidence
4) Equities are the place to be in this environment of massive Quantitative Easing
5) Emerging Markets in Asia, South America, Africa and the Middle East still have countries with high double-digit growth
6) Fund managers more afraid of missing the upside, and there's still lots of "doubting money" on the sidelines
Don't Short a Sleeping Bull
But don't take my word for it. Do the next best thing: look at what the market is telling you in its price action. The market is definitely not "waiting to go lower" as every attempt by short-sellers to get traction has been defeated. If anything, my mantra of the past four months is still true... it is "waiting to go higher."
The lines I have drawn here at 1,250, 1,275, and 1,300 are not just round numbers for convenience sake. They also happen to be areas where the market either had to fight for further gains or consolidated before using that level as support. Remember a drop from S&P 1,350 to 1,250 is only a 7.4% decline. It may come and it will be surprising when it unfolds. But I suspect buyers will come in before then.
Am I saying that some fear catalyst can't give us a sudden 5% pullback? Of course not. I only say "I wish!" Until then, it looks like the shorts will be pushed to their limits of financial and emotional fortitude.
Institutional portfolio managers have priced in sub 2% growth for the US economy. If they are wrong, we are poised for further upside surprises in the data and in earnings. Right now, the price action in the market is telling me they are not afraid of Europe imploding, or of China slowing down, or of Iran sparking a war.
Is that lack of fear bordering on complacency? I don't think so. I said at the beginning of the year that the market was entering a "slow grind higher." I also called for a shift from big-cap safety back into small-cap growth as money managers returned to the business of putting risk capital back to work.
That has occurred with the Russell 2000 index notching positive performance this year of over 10% compared to the S&P 500 at a 7% gain. I think this trend will continue.
So what should we do besides my strong advice that you "don’t short a sleeping bull?" You have to ask yourself how you will feel lying in bed at night, or waking in the morning, thinking about a market pullback of 5%, that could translate into profit give-back of 10-20% in your holdings. Will you wish you had sold half?
If the answer is "yes," then you know what to do. Even though I think the S&P will go above 1,400 this year and the Russell 2000 will hit 900, it doesn't mean you won't get more chances to play the upside.
So, if you feel "fully" invested, don't be afraid to take some profits and have some ready cash to buy the next dip. If it ever comes.
From "Sleeping Bulls" to "Hidden Bulls"
If you'd like some help, we're briefly re-opening my private trading group to new investors. Its purpose is to go long or short with stock, ETF and options moves to catch small market swings that others rarely see and ride them for quick, substantial profits.
The number of investors who share the moves from our Zacks Tactical Trader must be limited, and demand to get into the service was so intense that it had to be closed early when introduced last December. Now it is open to you again, but only until Saturday, February 18 at the latest. So you might want to look into it now.
Click now for details about Tactical Trader >>
Good Investing,
Kevin Cook
Kevin, a Senior Stock Strategist at Zacks, is a recognized authority in global markets. A former market-maker in the $4-trillion-dollar-a-day world of interbank trading, he developed the ability to track the movement of money, and trained his reflexes to take advantage of it. Today he directs the new Zacks Tactical Trader, providing commentary and recommendations.
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| Market Summary | May 24, 2012 08:17 am ET |
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