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Markets Poised For More Gains Ahead, Which Stocks Will Lead?

Over the last 4½ months, stocks have been on a tear.

Since the pandemic lows in late March, the Dow has surged by more than 54%, the S&P by 55%, the small-cap Russell 2000 Index by 65%, and the Nasdaq by 70%! 

It’s been a record-setting move with both the S&P and Nasdaq having already broken out to new all-time highs, while the other indexes are not far behind.

But the best part is that it looks like there’s a lot more upside to go.

History has shown that after bear markets end, the bull market rallies that follow are nothing short of spectacular. 

And because our economy was so strong before the pandemic hit (in fact it was considered the strongest economy of our lifetime with 50-year low unemployment, 20-year high in household income, and near record high in consumer confidence), the bounce back has also been the fastest and strongest of our lifetime as well.

And with many analysts calling for ‘unprecedented’ growth for the remainder on the year, stocks are poised to soar.

More . . .


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Then and Now

We all knew once the pullback was over that a new bull market was inevitable. History has proven that.

While the record books show we entered an official recession in Q1 and Q2 (two negative quarters in a row are needed for a recession), it will almost certainly show we exited that in Q3.

But what we just went through should really be called a suppression instead.

Recessions usually come about after a period of expansion. Excesses are built in. Inflation begins to rise. Interest rates go up to combat this. Growth slows, and ultimately contracts.

Then the economy resets. Excesses are wrung out. Interest rates go down. And a new period of growth emerges.

But the recent slowdown was not due to the typical boom/bust cycle described above.
Economic activity was artificially suppressed due to the lockdowns imposed to flatten the virus curve and contain the spread.

But that’s largely over. All 50 states have reopened their economy in some shape or form, although some slower than others. The recent rise in coronavirus cases has created some setbacks, and forced some cities to impose new restrictions. But nationally, the rate of new cases is finally slowing. The reopening continues, bumps and all. And we’re seeing huge pent-up economic demand being unleashed.

You can see that in the latest Employment Situation Report which showed we gained 1.763 million new jobs last month vs. estimates for 1.675 million. And that comes on the heels of the previous jobs report which showed 4.8 million jobs gained vs. 3.0 million jobs expected. And the one before that which showed 2.7 million jobs gained vs. expectations for -7.7 million jobs lost. All in all, that makes it three months in a row of better than expected job gains totaling 9.279 million.

The stronger than expected recovery is also being underscored by surging Retail Sales which are actually above pre-pandemic levels.

Factory Orders, Manufacturing, and Non-Manufacturing are all on the rise.

And Housing is setting records: Housing Starts surged 22.6% in their latest report; the Housing Market Index just tied the highest level in its 35-year history; and Mortgage Demand has climbed to an 11-year high.

And that’s just for starters.

Q3 GDP is expected to rise an unprecedented 20%, with another double-digit gain in Q4.

And GDP for all of 2021 is expected to grow by 5% (the largest annual GDP growth rate in 38 years)!

This is why stocks are soaring. And why they should continue to do so.

Helping Hand

Another reason why analysts are calling for an unprecedented economic recovery is because of the unprecedented aid that has been made available to businesses and workers.

So far, nearly $10 trillion in fiscal and monetary stimulus has been pumped into the economy.

And it looks like more is on the way.

While there’s uncertainty around the fate of a fourth coronavirus relief/stimulus bill, there were four executive orders signed the other week that provides for much of the additional aid that the bill would have, including supplemental unemployment payments (which could go out at the beginning of September), a temporary payroll tax cut, a moratorium on evictions, and suspension of student loan payments. That should go a long way in helping those still hardest hit by the virus and stimulate the economy even further.

Let’s also not forget that the Fed slashed interest rates to near zero. And it doesn’t look like those are going to go up anytime soon. That’s bullish for both businesses and consumers as it keeps more money in people’s pockets, increases everybody’s purchasing power, giving them more money to spend.   

These supportive measures are nothing short of historic, and why this rally has been just as historic.

Riding the Bull 

It’s been an amazing rally so far. 

And while it would seem like large-cap tech is the only game in town, that’s far from the case.

True, the tech-heavy Nasdaq has been leading the way. And the over-weighted, large-cap tech names have given the S&P a lift as well.

But we’re seeing record gains in many industries.

And it’s clear this recovery is multi-faceted. That’s important because the expanding breadth of this recovery makes it broader based and more sustainable.

Widely followed, mega-cap tech names are still hot. But so far in August, the top performing sectors beating Tech have been 1) Transportation, 2) Homebuilders & Construction, 3) Industrials, 4) Consumer Discretionary, 5) Basic Materials, and 6) Energy. Technology comes in 7th.

Sector rotations take place in every market rally. And it’s already begun. Same goes for market-cap rotations as well.

Granted, virtually everything is going up right now. 

But make no mistake, there will be distinct winners and losers moving forward.

You just have to know where to look.

Do What Works 

The best way to find the new market leaders is to stick with time-tested methods that work.

For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 26 of the last 32 years with an average annual return of 24.5% per year? That's nearly 2.5 x the S&P with an annual win ratio of more than 81%.

That includes 2 bear markets and 3 recessions.

Did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!

Those two things will give any investor a huge probability of success and put you well on your way to achieving your investment goals.

But you’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.

So the next step is to get that list down to the best 5-10 stocks that you can buy.

Proven Profitable Strategies

Picking the best stocks is a lot easier when you focus on proven, profitable strategies to do it.

And by concentrating on what has proven to work in the past, you’ll have a better idea as to what your probability of success will be now and in the future.

Here are a few of my favorite strategies that have regularly crushed the market year after year, in both good times and bad.

New Highs: Studies have shown that stocks making new highs have a tendency of making even higher highs. And this strategy proves it. The alignment of positive price action and strong fundamentals creates all the necessary conditions to see these stocks soar to even greater heights. Over the last 20 years (2000 thru 2019), using a 1-week rebalance, the average annual return has been 47.8% vs. the S&P’s 6.0%, which is nearly 8 x the market.

Filtered Zacks Rank 5: This strategy leverages the Zacks Rank #1 Strong Buys, and adds two time-tested filters to narrow the list of stocks down to five high probability picks each week. Over the last 20 years (2000 thru 2019), using a 1-week rebalance, the average annual return has been 54.1%, which is 9 x the market.  

Small-Cap Growth: Small-caps have historically outperformed the market time and time again. Often these are newer companies in the early part of their growth cycle, which is when they grow the fastest. This strategy combines the aggressive growth of small-caps with our special blend of growth and valuation metrics for explosive returns. Over the last 20 years (2000 thru 2019), using a 1-week rebalance, the average annual return has been 54.7%, beating the market by 9.2 x the returns.

The best part about these strategies (aside from the returns) is that all of the testing and hard work has already been done. There’s no guesswork involved. Just point and click and start getting into better stocks on your very next trade.

Where to Start 

There's a simple way to add a big performance advantage for stock-picking success. It's called the Zacks Method for Trading: Home Study Course

With this fun, interactive online program, you can master the Zacks Rank in your own home and at your own pace. You don’t have to attend a single class or seminar.

Zacks Method for Trading covers the investment ideas I just shared and guides you to better trading step by step, plus so much more.

You'll quickly see how to get the most out of the proven system that has more than doubled the market for over three decades. Discover what kind of trader you are, how to find stocks with the highest probability of success, and how to trade them so you can consistently beat the market no matter where stock prices are headed.

You’ll get the formulas behind our top-performing strategies suited for a variety of different trading styles.

The best of these strategies produced gains up to +122.2%, +153.0%, and even +156.8% from 2017 through Q2 2020.

The course will also help you create and test your own stock-picking strategies.

Today is the perfect time to get in. I'm giving participants free hardbound copies of my book, Finding #1 Stocks, a $49.95 value. Its 300 pages unfold virtually every trading secret I’ve learned over the last 25 years to beat the market. 

Please note: Copies of the book are limited and your opportunity to get one free ends at midnight Saturday, August 22, unless we run out of books first. 

If you're interested, I encourage you to check this out now.

Find out more about Zacks Home Study Course >>

Thanks and good trading,

Kevin

Zacks Executive VP Kevin Matras is responsible for all our trading and investing services. He developed many of our most powerful market-beating strategies and directs the Zacks Method for Trading: Home Study Course.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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