Why this market has been rallying
The market's reaction to the Fed's Jackson Hole meeting last
week reminded me of my recent experience buying a car.
Armed with a rough idea of the size I needed and the price I was willing to pay, I test-drove several vehicles that were all pretty much the same. I found myself staring at them with glazed eyes while the salespeople make their pitches. After a few days of this indecision, one guy simply cut a bunch of money off the sticker price and I gave in.
The point is that I bought the car because I needed it. It was simply a question of what catalyst would get me to sign on the dotted line.
That's the case with Ben Bernanke's statement on so-called stimulus: "The Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability."
Is this any surprise? Does anyone doubt that if the economy suddenly nosedived off the cliff tomorrow the Fed would take action? Is the sky blue?
Yet that is exactly what caused the market, and precious metals in particular, to rally. Given that there was nothing new in the statement, we must conclude that it wasn't the reason for the gains. The reason, in fact, was the same as why I bought the car: I needed one.
Investors need stocks and precious metals now. They're fully loaded on Treasuries and underexposed to equities. It's that simple.
Forget about the Fed and Europe. The simple fact is that stocks are underowned, and we're not going into recession. Period.
Then we have emerging strength in the small-cap Russell 2000 index, which has started outperforming the broader market in the last month. One final ingredient is that companies are now better managed and stronger financially than at any other moment in history.
Put all those pieces together, and here's what you have: The U.S. economy is not in recession, and stocks are underowned.
To that end, I'd like to close with some final trading ideas from researchLAB . As usual, these are starting points to give you ideas rather than recommendations.
Monolithic Power Systems (MPWR) : This small-cap chip maker has been beating estimates and growing at a double-digit pace. Piper Jaffray cut their rating yesterday, citing valuation, but those kind of downgrades often provide good buying opportunities. After all, it was rallying for a reason!
Rental companies : These stocks have been in a secular uptrend because banks have been slow to lend. In some respects, they devoted so much of their attention to mortgages in the last decade that they've forgotten how to do other kinds of business. These companies have been leasing items that were previously owned and financed--from machinery to furniture. Aaron's Rentals (AAN) looks especially interesting.
Deathcare : The ultimate secular pick. It's not hard to predict the wave of funerals that will occur in the next 20-30 years as the Baby Boomers age. Many of them will buy their graves and services years before under so-called preneed contracts. Now's the time for this trend to really get going with the oldest Boomers over 65. Service Corp. (SCI) has just broken out and looks pretty interesting.
Firearms : The improving jobs picture increases the chance of Obama getting reelected, and that will rekindle fears of gun owners who've been stockpiling weapons ahead of potential bans down the road. The charts on both of these companies, Smith & Wesson (SWHC) and Ruger (RGR), are amazing and appear to have more upside in the works.
(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Sept. 5.)