Based on my work this weekend and the recent price action, it feels like the market wants to breakout to new highs over the next 3-6 weeks. I came into the year cautious, and that proved to be wise as the market has been extremely volatile to start the year. I don’t think they will make this breakout easy for the Bulls. I still expect pullbacks, head fakes, and quick news-driven shakeouts (such as the one we saw last Wednesday afternoon from the Greece headlines). However, overall I see the market moving higher over the near-term for the following reasons:
1) Global liquidity. As they say, “don’t fight the Fed.” Well, I certainly wouldn’t fight a globally coordinated effort of Central Banks. So far this year, 17 different countries have cut interest rates. I maintain that the US Fed will NOT raise rates until 2017 (if they ever raise them at all). In fact, they will be so accommodative that I wouldn’t be surprised to see more Quantitative Easing BEFORE we see a rate hike.
2) The S&P MidCap 400 Index $MDY made a new all-time high this past week. The Russell 2000 $IWM is putting in a nice year-long consolidation after its strong gains in 2013. These two indexes tend to be leading in nature (both to the upside and downside) and could see continued upside soon. In addition, all the major indexes had HUGE volume accumulation weeks last week, showing continued signs of institutional buying.
3) Oil $USO seems like it has stabilized for now. The Energy $XLE and Financial $XLF sectors have weighed down the markets so far this year. If they decide to participate, it could be what lifts the markets higher. My strongest ideas continue to come from the Biotech $IBB, Semiconductor $SMH and Healthcare $XLV sectors.
4) The market had 3 different chances to break down and fall apart so far this year. Every time, that constant “magical bid” appeared to prop the markets up. Part of the reason is there is no complacency in the volatility markets. In other words, much of the recent hedging done by institutions is in the VIX futures and options market, and not the S&P. Therefore, there’s a persistent bid in hedging devices but not enough actual sellers when the market starts to fall.
As I mentioned in the beginning, it will not be smooth sailing to the upside. My biggest concerns are the high levels of bullishness and the never-ending geopolitical conflicts. However, the price action of leading stocks overrides everything. The market has had several opportunities to drop and it just keeps rebounding strongly. There’s too much liquidity out there and the price action keeps improving.
I can be reached at: jfahmy@zorcapital.com.
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