The test is over. And the stock market rally has passed.
On November 16, the Standard & Poor’s 500 and the NASDAQ 100 both joined the Dow Jones Industrials in setting new recovery highs.
In other words all three indexes have busted out of the trading range of 1025 to 1098 on the S&P 500 that had threatened to keep stocks locked up in a narrow band for more than a month after that October low.
On November 16, the Standard & Poor’s 500 closed at 1109, well above the 1098 high set on October 19. The Dow Jones Industrials closed at 10407. The Dow Industrial Average hasn’t been that high since October 2008. The NASDAQ 100 closed at 2198, a level that index hasn’t seen since November 2007.
On November 12 I wrote that the market would either break above 1098 on the S&P, signaling that we were headed for a new recovery high and that the rally was alive and well or fail the test and sink back toward the lows at 1025. When the market is in a rally each high will be higher than the one before and each low will be at a higher level too.
So the action of the last few days says that this rally still has a way to run. How far?
As far as I’ve written repeatedly lately as the flood of global liquidity, borrowed dollars flowing into commodities, and a falling U.S. dollar can take it.
Through the end of the year certainly and probably deep into the first half of 2010.
The only things that could derail the rally at this point are an interest rate increase from the Federal Reserve that drove up the price of the U.S. dollar, believable promises from developed economy central banks that they are going to remove stimulus funds from the economy, or convincing evidence that the global economy—or at least a handful of the economies that count such as China, the United States, India and Germany—were growing much, much more slowly than anyone had projected.
Any of those three events is possible. But each of them would take time to develop into a convincing argument for selling.
One thing to note about this stage of the rally: It’s being led by large cap stocks. Indexes that represent smaller companies than the Dow, the S&P, or the NASDAQ 100 such as the Russell 2000 or the NASDAQ Composite have lagged in this latest stage of the rally after leading the market upwards earlier in the year.
I’m not exactly sure what that means. Since big company stocks lagged earlier in the rally they are relatively cheaper now than small cap stocks. Maybe the recent outperformance of big company stocks is just an example of investors seeking relative value.
Or maybe it’s a precursor of end of the year window dressing. If a lot of big institutional investors have finally decided that they have to be more fully invested by the end of the year, big caps are a likely beneficiary. If you need to put billions to work you buy ExxonMobil (XOM) or McDonald’s  (MCD) rather than 25 smaller stocks that can’t absorb more than a few tens of millions without soaring out of buying range.
I think this rally continues to have legs. It is worth investing in or staying invested in.
But don’t forget that this rally hangs on two assumptions. First, that the global economic recovery has gained enough momentum that it will be sustainable in 2010. No back sliding into a double-dip recession. And second, that none of the world’s significant central banks is going to start tightening money supply until way into 2010 at the earliest.
Neither of those is guaranteed.
Jim,
Can you please provide an update on MIDD? Thanks for the good work.
We should all recognize that this rally hasn’t been driven by individual investors. To take one indicator, Morningstar data showed that until September individuals were in net taking money out of stock mutual funds. The instiltutional guys, the big traders who can tap into the dollar carry trade have been driving stocks upward and they continue to be the driving force. That said, I don’t see these “investors” buying big caps as some kind of move to safety. Significant that fourth quarter is the first in 2009 where the dollar is weaker than it was a year ago and where it will consequently add (instead of subtract) from earnings per share. That would be a reason to buy big caps–since they have mor international sales than smaller companies.
I agree with Robert1234. I think we are seeing people move to a position of security. It’s what I started doing a couple months ago. I think others are starting to follow suite. Might as well get the dividend with some potential for gain.
Does anyone have a good web site for insight on the technical merit for the current rally?
I believe in Graham’s way of investing. Holding value stocks. I also believe in Warren Buffett that in the short term the market is a voting machine, in the long term a weighting machine.
Where can I park my money if these papers buy less and less each year ? Why stocls should not climb ?
At this point I want to know what to do when we finally get an interest rate increase from the Federal Reserve next year. The near term strategy seems obvious. Jim, please give us your thoughts.
large caps might just be undervlaued like he said, when people get really scared they usually head to bonds, at least thats what happened in 2008. Only 1 thing is certain, this rally wont last forever haha. But if you built your positions early enough, you should have very strong hands at this point.
Large Cap will benefit more from the weak dollar
I think the Transports confirmed the Dow Theory today, as well.
I really hate this market…and I’ve been riding the momentum like a lot of other people. It still feels like Vegas to me and I don’t like gambling.
At some point in the very near future, I’m going to be moving out of equities and into hard assets.
My friend and guru says that when big cap stocks lead, it signals the end of a rally. Why ? Cause they are the least risk. The money flows out of small caps, into big caps in the closing stages.
Me, I am scared to death of this market. I am 50% in grains gold and sliver, and 50% in cash.
market goes up, market goes down. no one can predict the market accurately consistently, but the reasoning behind the trade wind theory sounds pretty legit to me. You put your money at risk whenever you put your money into the market be it bear or bull. I will continue to build my positions slowly and carefully.
Meredith Whitney late today came out with a prediction that the market is heading lower. She has a track record of making the right call. As much as I like this time of the year for stocks, I think the market has gotten ahead of itself.
I used today to load up on some Dec 111 SPY PUT between 2.69 – 2.72.
I feel quite safe with these and believe that we won’t see the typical “Santa Rally” that we’ve seen in years past. However, I am keeping a pretty tight stop on it..
My GLW that I said I bought a few days ago in the 14’s has been running like an Olypmic Gold Medalist. (as with the broader market)..
Staying cautious and implementing some trailing stops on things I’m ready to cash out on..
Just afraid that the dollar will come strong over night, and derail a rally..
Sooooo many things could derail the rally. Whatever it might be, it is most likely to occur right about the time I move more heavily into stocks. I’ll try to keep you posted as to when I start buying so you can start paring back.
Don’t forget that early 2010 could see an Israeli strike against Iran, and that could certainly derail the rally as well.