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Zacks Market Strategy Update

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Here is a brief summary of highlights in October’s Zacks Market Strategy.

Top-Down S&P 500 End-of-Year 2012 Target

Holding or raising new S&P 500 (SPY - Free Report) highs above 1470 is possible, but the more likely scenario we are in is a range-bound market until a firm resolution of Fiscal Cliff issues. 1390-1400 is our low end. One stop lower, the 200-day moving average rests at 1375.

In late October, some Zacks experts think equity markets have reached a phase where you have a battle of the long-term bullish view vs. a short-term range-bound and even bearish view.  Long-term, one has to believe the primary bullish trend is intact until proven otherwise. That is especially true with GDP expected to ratchet up to +1.9% growth in the 3rd quarter versus only +1.3% in the 2nd quarter. 

However, in the short term, this stock market has some gains to digest, a Presidential election dead-heat, and a Fiscal Cliff problem looming right behind.

On the Fiscal Cliff, the San Francisco Fed had this to say:

We assume Congress will let the payroll tax reduction and extended unemployment benefits expire at year-end, but will agree to extend the Bush tax cuts and adjust the alternative minimum tax.

We also expect Congress to limit the spending cuts mandated in the Budget Control Act of 2011.

In October, six macro trends had notable effects on S&P 500 Sectors and Industries

(1) For Zacks-Ranked goods and services industries, we see the Housing Recovery in strong earnings surprises tied to Housing.

Housing (ITB) and Construction (MLI - Free Report) , (MTB - Free Report) -related goods and services industries that have very strong Zacks Industry Ranks include Home Furnishing-Appliance, Building Products, and Construction & Engineering.

Building momentum in U.S. housing also helps the Financials sector.  We see a strong Zacks Industry Ranking for Banks-Major and Banks &Thrifts.

(2) A stronger U.S. stock market is a new macro theme.

Investment Banking & Brokering saw an upgrade in October.  Strong U.S. stock markets keep the Investment Fund industry one of the most highly rated.

(3) With modest GDP growth, Consumer Staples is presently a key strength.
(4) Fiscal Cliff tax sunsets that will raise U.S. personal income tax rates or sequestration that cuts spending appear to hurt the Industrials sector.  We have seen weakness in capital goods spending and hiring.  

Industrials weakness is apparent in October downgrades to Industrial Conglomerates, Metal Fabricating and Commercial Services for Industrials.

(5) IT weakness is a notable feature of the weak global GDP growth environment.  Growing revenues is difficult for the big global IT businesses.  The shift to smaller screen tablets and mobile is not helping, either.

There is no highly rated IT industry.  In an important signal, October saw a downgrade to the Semiconductor industry.

(6) China slowdown issues play out with a Market Weight rating to Energy.  

In addition, there are other notable effects to Materials and Industrial sectors.  The Steel and Metals-Non-Ferrous Industries are still struggling due to these China slowdown effects, along with the Coal industry. Another element to the China slowdown is fresh weakness in Transportation industries, which saw a notable downgrade in October, as weak coal shipping and prices play out.

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