You Can’t Be Afraid To Make Money

I have heard the following statements over the past few months: “The market has moved too far too fast", “We’re due for a 5% correction", or “I’ll wait to buy that stock cheaper." We all should buy stocks to make money. When the stocks we buy go up we should be happy with our selections. Many of the people that talk about too far too fast are on the sidelines. The market roared ahead in the first quarter of 2012. Those that focused on the negative were left eating the dust kicked up by the bulls.

Many entered 2012 with tempered expectations for the year. Many of the concerns brought up were valid but, in my opinion, people put way too much emphasis on their own view. The point of my weekly musings has been to tell you what the market is saying. From my perspective the potential problems that could derail the market are usually pretty clear. Coming into the year people were talking about the level of debt here in the U.S. and the myriad of problems in Europe. These were serious concerns to be sure, but concerns that were clearly recognized by the market. How can we take all the issues we hear or read about every day and come up with a method to pick stocks? 

Follow the drill people! Again, I will use the Leading Economic Indicators (LEI’s) to give me a view of the macroeconomic picture of the economy and will look at the overall technical condition of the market to tell me if I should be bullish or bearish. In both cases I will use the weight of the evidence to determine how things look today and when potential turning points are developing.

The LEI’s for March remain strong. There have been some mixed results from regional PMIs lately. But, overall things continued to improve in March. Today we had the March ISM released. The number was better than expected coming in at 53.4 versus expectations of 53.0. The number in February was 52.4. Housing activity data was weak last week. Commodities were also under some pressure. The commodity complex is working higher today. Investor sentiment was improved last week. Investors are showing an increased appetite for risky assets. 

The overall technical picture of the market remains constructive. 84% of stocks in the S&P 500 are either basing or advancing. Of that total 72% are advancing. That figure has remained in the low 80% range for a while now.  There has been added strength over the last few weeks in mega cap blue chips like Coca-Cola and Johnson & Johnson. Many of the names that people could not get enough of in the NASDAQ bubble years are again acting beautifully (IBM, EMC, Qualcomm, Microsoft, Intel, and Cisco Systems for example). The S&P 500 is adding to its Q1 gains on the first day of trading of the second quarter.

There has been some weakness in smaller stocks over the past few weeks. I have mentioned the Russell 2000 index lagging the larger cap indexes several times this year. 81% of secondary stocks are in sound shape technically. That is down slightly from the recent high of 85%. We will have to keep an eye on that number in the coming weeks and months. This is a sign that the market is becoming more selective in the stocks it favors. 

Both the long term and intermediate term trends for the market remain strong. I pointed out the number of names in the S&P 500 that are acting well technically. All the major averages are trading well above critical moving averages. The advance-decline line on all NYSE stocks reached an all-time high last week. In an environment like this pullbacks typically are controlled. 

With the majority of the sectors of the market in sound technical shape the intermediate term outlook is also positive. This sector strength gives us a wide variety of individual names across several industry groups. 

Since my longer term views on the market are constructive, let’s look at the near term picture: There have been a number of divergences that have developed over the past several weeks. Any time there has been a failure by an index to breakout, the markets have held the resulting support levels. As the market has tested support, buyers have come in and moved the market higher.  Here are the support levels for the S&P 500, Dow, NASDAQ and Russell 2000: 1390/13,000/3068/817. If these levels fail to hold on any test then we will get our first sell off for quite some time.

That is my drill. When the economic readings or the technical pulse of the market weakens I will let you know. When that happens I will be more defensive. I do not try to predict when that will happen. That is a fool’s game in my opinion. That is because, from my perspective, the opinion of the market carries far more weight than any great theory I can come up with.