rebounded from four-month lows in heavy trade as lawmakers
started talks Friday to avoid the treacherous fiscal cliff that
threatens to throw the country back into recession.
In afternoon trade,
SPDR S&P 500
) was ahead 0.32% to 136.14 in nearly double average volume.
), tracking the 100 largest nonfinancial stocks on the Nasdaq,
rose 0.28% to 62.20.
SPDR Dow Jones Industrial Average (
) shed 0.12% to 125.36.
SPY and DIA have dropped 8% from their multiyear highs as of
Friday. QQQ has tumbled 11%.
IShares MSCI EAFE Index (
), tracking developed foreign markets, and
MSCI Emerging Markets Index (
) are down 7% and 10% from their highs, respectively.
Here are five reasons that will drive the market higher from
1. The market is oversold, stocks are trading at bargain
prices and the fiscal cliff may already be priced in.
"It seems late to be selling at these levels," said Ken
Mahoney, CEO of
Mahoney Asset Management
in Chestnut Ridge, N.Y., with $100 million in assets under
management. "We should get a short-term bounce. And the bounce is
the time to lighten up -- not when we're down this sharply."
With the market possibly having already priced in falling off
the fiscal cliff, any good news out of Washington could spark a
short-covering rally. In such cases, short sellers (who borrow
shares to profit from falling prices) have to buy shares to close
their positions. That boosts prices.
Stocks are valued quite reasonably at 14 times earnings, more
than 10% below their five-decade average of 16.4, Sam
Subramanian, chief investment officer at AlphaProfit Investments
in Sugar Land, Texas, wrote in his latest client missive.
Bill Peattie, founder of Peattie Capital Management in
Stamford, Conn., agrees. "Many terrific stocks with good
valuations are reporting strong earnings and yet are being taken
down in this environment," Peattie said. These includeApple
(AAPL) and wireless terminals and monitoring
equipment-makerTelular (WRLS) -- one of his core holdings.
2. You can't fight the Fed. One of the Federal Reserve's aims
in keeping interest rates low for at least two more years is to
push investors out of nonrisk assets like bonds and into the
stock and real estate markets.
The S&P 500 will find price support at its July low near
1320, said Mike Tarsala, a chartered market technician at
Covestor, a New York-based asset management firm. That translates
to 132.00 a share for the SPY.
"The current search should be for ETFs demonstrating
better-than-average relative strength in their respective
groups," said CJ Brott, chairman of Capital Ideas, a registered
investment advisor in Dallas. "They will be the biggest gainers
coming off whatever low we set."
IShares Dow Jones U.S.
Home Construction (ITB),Guggenheim China Real Estate
(TAO),EGShares India Consumer (INCO),SPDR S&P Homebuilders
MSCI Turkey Investable Market Index (TUR) all have IBD Relative
Strength Ratings of 90 or higher. That means their price action
outpaces 90% of the market.
3. The U.S. housing market is recovering. With a house being
most people's largest asset, rising home values makes people feel
richer and more likely to spend money, which the market loves.
President Obama's re-election means continued promotion of the
Home Affordable Refinance Program, or HARP, says Christopher
Macke, Boston-based senior real estate strategist with CBRE
Americas Research. Homeowners whose loans were acquired by Fannie
Mae or Freddie Mac on or before May 31, 2009, qualify to have
their mortgages refinanced at lower rates.
"This frees up more consumer income for discretionary
purchases," Macke wrote in a note. "It is estimated that an
additional three million homeowners would qualify for HARP."
The Federal Reserve's quantitative easing program, or QE3,
aims to make achieving the "American dream" more affordable. It's
buying $40 billion a month in mortgage-backed securities
4. Congress and the president will likely hash out a deal
before year's end to avoid the fiscal cliff. "I can't believe
that Congress and the president won't act before year-end," said
Matt Pierce, founder of Island Light Capital in Dover, Mass. "I'd
expect the lame-duck Congress to kick the can down he road for
the year with respect to tax increases and to override some
spending cuts. The economy is too weak to take a fiscal hit."
Tarsala of Covestor also sees a deal being reached. "President
Obama needs to keep from looking like a lame duck in his second
term, so he may be forced to change his threshold for who he
considers wealthy," Tarsala said. "Also, House Republicans simply
gain no ground by being seen as a roadblock to reaching an
Once the uncertainty dissipates, companies will start to put
cash back to work, said Ronald Lang, a principal at Atlas Wealth
Management in Philadelphia.
"Once there is a fiscal cliff resolution, of course with some
political and dramatic flair, the markets should run 5% to 15%
during the first quarter of 2013," said Lang, who manages $20
million in assets.
He's advising clients to buy dividend-paying ETFs and stocks
as they pull back to cheap levels.
"Even if dividend and capital-gains tax rates move up, these
higher yielding stocks and ETFs will still provide a combined
defensive posture along with an income stream," said Lang. "The
yield after taxes and accounting for inflation is still greater
than many municipal bonds, CDs (certificate of deposits) and
The popular dividend ETFs are
Dow Jones Select Dividend ETF (DVY),Vanguard High Dividend Yield
ETF (VYM) andSPDR S&P Dividend ETF (SDY).
5. Recent data show the economy is improving. Despite slower
growth rates overall, there are always some areas that will grow
faster than others. The Conference Board's measure of consumer
sentiment has risen to its highest level since February 2008,
Subramanian wrote. The Institute for Supply Management's U.S.
factory index rose to 51.7 in October, above the 50.0 level that
Between 1951 and 2000, gross domestic product grew an average
of 3.3% annually. But the new normal growth rate will likely be
1%, unless U.S. policies encourage more immigration, employment
and investment, said Christopher Brightman, director of Research
Affiliates in Newport Beach, Calif.
Investors should invest in areas that can endure in prolonged
periods of slow growth, says Russ Koesterich, managing director
and chief investment strategist at iShares.
"We see good opportunities in U.S. mega capitalization stocks,
which remain cheap and are levered to international growth
opportunities," Koesterich wrote in a client note released
Friday. "Technology is another long-term play as it has the
highest percentage of international sales of any sector and is
therefore the least exposed to a regime of slow growth in the
ETFs tracking the world's largest companies includePowerShares
Active MegaCap Fund (PMA),SPDR DJ Global Titans (DGT) and
Vanguard Mega Cap 300
Value Index (MGV) . The most popular tech ETFs includeVanguard
Information Technology ETF (VGT),Technology SPDR ETF (XLK) and
iShares Dow Jones U.S.
Technology ETF (IYW).
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