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Another Round of Records

February 21, 2017, 3:20 pm

It was another round of records for the broad market last week, with the S&P 500 flirting with new highs after Valentine’s Day and ending the week up 1.3%. And the party kept going today, with all three major indices hitting new highs again. Some of the gains have come on earnings season, which has been a good one. And even though another 870 companies are scheduled to report this week, the broad strokes have already been painted in.

Growth is tracking at a healthy 5% across the market as a whole, which would mark the first consecutive quarter of earnings growth since Q1 2015. At the start of the year, estimates were for Q4 earnings to increase 3.1%. This continued improvement in a wide range of sectors is just more confirmation of our belief that stocks will continue to move higher, because at the end of the day strength is based on underlying fundamentals – especially earnings. With the 2017 outlook improving each week, the future looks increasingly bullish.

Then there’s the Trump administration, which has talked about a big announcement on the horizon regarding tax cuts. There’s not a market in history that hasn’t welcomed tax cuts with open arms. And on top of that, economic numbers released last week show a solid economy as well as a pickup in inflation. All of these factors were viewed as bullish and acted as catalysts to send stocks higher.

I bring this up because improving economic readings combined with higher inflation could be the perfect storm for more interest rate hikes from the Federal Reserve. Chair Janet Yellen’s appearance in Washington last week sparked a boost in the odds we’ll get three 25-basis-point hikes sometime this year from 33% to 41% according to Fed Fund futures, and Goldman Sachs (GS) raised its odds of a rate hike at the next FOMC meeting in mid-March from 15% to 20%. While I don’t think a move in March is likely (unless something drastically changes in the next month), there’s still plenty of time for more rate hikes this year, so they are something we should be prepared for.

For more than a year the market fixated heavily on the Fed’s next move, but ever since the election ended and attention shifted to what’s going on in D.C. the central bank has taken a backseat. This can be good for easing market panic, but the Fed remains central to the future of stocks as interest rates will continue to play a role in performance through 2017.

My Top Three Valentine’s Day Stocks

February 14, 2017, 1:17 pm

There’s been a lot of love in the air on Wall Street these past couple of weeks, with the major indices hitting high after high on almost a daily basis—the S&P 500, Dow and NASDAQ all hit new intraday records just yesterday and the Dow reached another one today.

As a special Valentine’s Day gift to you, I’m sending you my latest video to share the top three stocks that are sure to feel the love today, too. Click below for all the details!

[ Click here to play message from Hilary Kramer ]

I hope everyone has a lovely Valentine’s Day!

Tuning Out the Noise to Keep the Profits Rolling

February 6, 2017, 1:26 pm

It was a little over a week ago when the Dow cracked its 20,000 milestone and the S&P 500 traded above 2,300 for the first time ever, but the strength was short lived as the indices were overdue for a bit of profit-taking.

But profit-taking wasn’t the only thing that sent the market lower. Another catalyst for the selling was President Trump’s executive order that blocked immigrants from seven foreign countries from entering the United States. While the order itself won’t have much (if any) impact on the economy and market over the longer term, the media ran with the story and found ways to connect them anyway. And given that the indices were already oversold in the short term, it led to some anxiety and a reason for some investors to ring the register on stocks that had rallied the last couple of months.

However, that selling needs to be put into perspective. Yes, the S&P 500 experienced a four-day losing streak January 26 through January 31, but the index was only down 0.85% from its all-time closing high. In addition, the Dow and NASDAQ ended last week at new highs with the S&P not far behind. That shows the resilience of the bulls, as not even a flurry of executive orders – which the media deemed as very negative – was able to significantly bring down stocks.

One reason the bulls and the market have been so resilient in the face of growing concern over what will happen under the new administration is the underlying fundamentals. You may not know it from reading the headlines, but we’re actually in the heart of the fourth-quarter earnings season. The financial media continues to focus its attention on D.C. rather than Wall Street, so it has failed to focus on the fact that the season has so far turned out better than expected. Companies are beating expectations, which in turn helps improve the valuation metrics used by analysts, and as I’ve talked about many times in the past, improving earnings will be the catalyst that drives stocks higher over the long term.

This just goes to show that it can be difficult to tune out the noise and focus on what’s really driving the market, especially when there’s a lot of unpredictability coming out of the White House. But there are ways for investors to manage the ups and downs.

First, it’s imperative that we don’t react to news bombs when they explode as this leads to emotional decision making and overreactions in stock prices. It is much better to let the smoke clear and see what appears in the aftermath. Odds are that there will be nothing new behind the smoke – once again, it was just the media and investors panicking. But if we let ourselves get caught up in the noise, we’ll find ourselves investing without a strategy or edge. Without those, we have very little chance of making money.

Instead, it’s best to use the market’s overreactions to our advantage by buying on the short-term dips and selling into strength. The S&P 500 has been trading in a narrow range recently and is currently at the same level it sat at in mid-December, but there’s no question that underlying stocks and sectors are on the move. That’s a great place to start when looking for your next buying opportunity.

What to Expect Following an Historic Week

January 30, 2017, 3:25 pm

Wall Street has been waiting on pins and needles lately, but last Wednesday the Dow finally reached (and then broke) its 20,000 threshold. It only took the index 42 days to rally the thousand points from 19,000. However, if you’re placing your order for Dow 40K hats, you may want to skip the expedited shipping. It took the index 17 years to double from 10,000 to 20,000.

As we’ve talked about, the Dow hitting this historic milestone isn’t necessarily bullish in technical terms, but it does have larger psychological implications. Most headlines had something to do with Dow 20K and social media was similarly abuzz.

This type of media exposure does two things. First, it gives those investors sitting on the sidelines the “sign” they’ve been waiting for to get back into the market. And even more important is that it nudges those who have sworn off the market over the last decade due to volatility and negative connotations regarding Wall Street. There’s a major case of FOMO (or the fear of missing out) going on around the country, and those who have sat on their cash all this time will finally begin to realize that they’ve missed out on a major market rally. They’ll fear that if they don’t get back in soon, they’ll also miss out on the next chance to make big money.

It’s difficult to argue with the turnaround in corporate earnings over the last two quarters. On top of beating expectations in the third quarter, S&P 500 companies also reported positive quarterly results for the first time in more than a year. Now we’re in the heart of the fourth-quarter reporting season and once again, the numbers look better than expected.

Approximately 70% of the S&P 500 companies that have already released their numbers have beat Wall Street’s estimates, and there are still a lot of heavy hitters left to report. From day to day, the market’s PE ratio is irrelevant because trading is actually being driven by news and emotions. However, the PE is still extremely meaningful over the longer term, so considering the “E” in that equation is earnings we still want to see results increase, as it will not only make the ratio more attractive, it will be a catalyst for the current rally to continue.

I don’t normally like to toot my own horn when I make accurate market predictions – I prefer to let our results speak for themselves – but this time is different than most. For months, I have maintained my positive outlook on the market even as Wall Street analysts have wavered between the bullish and bearish camps, causing panic for many investors out there. That conviction has paid off—and even with the slow start to this week, I see plenty more upside in the future.

The Dow’s breakout above 20,000 combined with the charts and solid fourth-quarter earnings season leads me to believe that the underlying uptrend will continue at least into the end of the first quarter. And it still isn’t too late to get in the game, with stocks looking even more attractive on the broader market’s current pullback this week.

Odds are good that the S&P 500 will finish 2017 up near historical averages, possibly in the 7%-9% area. Each and every bout of weakness will be scrutinized by the mass media as the “beginning of the correction,” but the smartest investors will simply ignore the noise and use those pullbacks as strong buying opportunities.

Buy the Election, Sell Inauguration?

January 25, 2017, 11:21 am

With the inauguration behind us, the focus now is on Trump’s first 100 days in office. Wall Street is most interested in what happens with regulations, taxes and infrastructure spending. I expect U.S. corporations will get an incentive to repatriate the roughly $2 trillion in cash they’re currently parking overseas. Even if that money is taxed at 10% as proposed, that’s a windfall of roughly two full years of profits for the S&P 500 coming out of the deep freeze and getting back to work.

A full-fledged corporate tax cut may take a little longer – and I don’t know how big the cut will end up being – but the impact could be huge. It would be a one-time growth accelerant for every profitable company on Wall Street, and nobody wants to be trapped on the sidelines when the “profit” side of the P/E calculation could jump 30% overnight.

There will be ups and downs along the way – which is fine because investors need both – but I continue to like the overall market environment. The good news is that earnings look constructive over the next few weeks. I’ve been tracking the trend every Friday, and the numbers keep getting better. We’re now on pace for 3.4% growth this season, which is nicely above what Wall Street was tentatively hoping to see. If the pattern holds up, this could be the best quarter in years. That’s great for trend trading and how the results impact the charts.

I’ve been asked a lot recently whether the election rally will reverse now that Trump has been sworn in and his administration is getting to work. I’ve also heard it talked about on the Street. Instead of “buy the rumor, sell the news” it has turned into “buy the election, sell the inauguration.” But everything I see indicates that it’s more talk than conviction at this point.

First, if big money was preparing to dump stocks once the transfer of power was complete, there would have been at least a few crucial “tells” – such as rising short interest and declining buy volume. After all, big money is complicated. It takes days if not weeks to shift massive portfolios, and during that time fund managers would be busy setting up new hedges and interim positions to make money if they really expected a downswing ahead. Those defensive positions have not materialized. Short interest on the S&P 500 as a whole has actually dropped 17% since the year started.

Granted, the big benchmarks have traded in a tight range the last few weeks, but some consolidation is natural after a 9%–10% surge. Even in this sideways cycle, the day-to-day action reveals that the sellers are actually at a disadvantage. So far this month, over 200 million more shares of the iShares SPDR (SPY) – one of the biggest exchange-traded funds on the planet, tracking the S&P 500 as a whole – have been bought than sold. Things may have quieted down after the initial post-election surge, but the bulls are still backing up their conviction with money and enthusiasm, increasing the odds of a fresh breakout to the upside.

I expect to see a lot of churn in the next few weeks, so stay on your toes if you expect to keep up as the market adapts to this new administration.

Ushering in a New Market Environment

January 20, 2017, 3:33 pm

It’s been a big week for Wall Street as key earnings reports rocked the market and Washington officially welcomed a new administration today. Donald Trump’s election victory sparked a major market rally that’s buoyed stocks to new highs, but there’s been increasing concern among investors as to what will happen in his first few months in office.

The bears are starting to bring up 1981, which is when Ronald Reagan moved into the White House. The S&P 500 rallied 9% from Election Day (November 1980) to Inauguration Day in January 1981. Over the next year and a half, the market lost approximately 30% of its value. Today’s naysayers are suggesting a similar pattern is about to unfold, but there’s no real comparison between 1981 and 2017. Interest rates were in the double digits and the economy was moving toward stagflation back then; today’s interest rate on a 10-year government bond is less than 2.4% and GDP should grow about 2.5% this year.

Another significant difference is that corporations are currently set to continue the earnings growth trend that began in the third quarter. The S&P 500’s EPS estimate in 2017 is $131, well above the $109 estimate for 2016. With the fourth-quarter reporting season underway, we’re starting to get a better picture of how 2016 wrapped up and some insight into how corporations are faring heading into 2017. If the numbers end up in line with estimates, it would result in 20% earnings growth in 2017 for the S&P 500.

While that’s a great number, the index’s recent run has already priced in a lot of that expected growth and could struggle to extend its gains unless the bottom line expands at a higher pace. At 18X 2017 expected estimates, the S&P 500 could meet its high around 2,358. However, I look for Trump’s policies of lower taxes, less regulation and an increase in infrastructure spending to help spur the economy, which in turn would create the higher earnings growth needed to keep the market moving upward.

Even if stocks don’t meet that full upside potential, I see no signs of a recession or major pullback. Let me repeat that: no signs of a recession. U.S. growth will likely increase this year and corporate expansion is almost a given. Plus, I continue to see underlying strength in stocks. The chart of the S&P 500 below illustrates this over the last few months.

After hitting support at the 200-day moving average (the blue line) the week of the November election, stocks have been on a major tear higher. Along the way, support has been established at the 50-day moving average and nothing indicates anything more than a healthy pullback ahead. A dip to the middle of the support zone (2,214-2,234) indicated above wouldn’t be surprising, but even a drop to the lower end would only bring the index down to well within the realm of normal considering the extent of the market’s rally since November.

If that does happen, savvy investors will meet any pullback to a major support level with open arms as an opportunity to add  quality stocks at a discount.

 

Two Critical Pillars Supporting the Market

January 11, 2017, 1:28 pm

The continuing post-election rally has helped start 2017 off on an up note, confounding the skeptics who believed we’d see at least a slight correction on tax-loss selling that was deferred to the New Year. The indices remain near all-time highs, and the Dow still has its sights set on the 20,000 milestone.

We’re also already seeing a change in leadership as lower interest rates and oil prices have taken some steam out of the financials and commodity-based companies that led the late-2016 charge. The NASDAQ and FANG stocks – Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOGL) – are back in rally mode for now, as lower rates are a major source of support for these growth heavyweights.

The next several weeks will be critical for the market as the two main pillars of the post-election rally will be tested. First is the fourth-quarter earnings season, which gets underway this week with several of the major banks scheduled to report numbers. After three years of flat results in the S&P 500, Wall Street is looking for earnings to increase from $118.69 in 2016 to $132.87 in 2017. The index could be vulnerable to any meaningful slip in expectations with it trading at a not-so-cheap 17X 2017 estimates, but I do not expect this to happen with oil prices still well above last year’s levels and global economies remaining firm. Still, sliding guidance throughout the year has been the norm in the recent past, so it would be smart to keep a very close eye on this going forward.

The second pillar ties in partially with the first and is one of Wall Street’s hot topics right now: Donald Trump’s plans for economic stimulus and the odds of that legislation making its way through Congress. While there is a lot of talk surrounding infrastructure spending and deregulation, what I’m most interested in is corporate tax reform, which is an issue that if done right can provide an immediate boost to most companies’ future earnings while penalizing others. Plus, I also believe it has enough support from Democrats and Republicans who remain skeptical of Trump in order to pass. While specifics are lacking, a plan to lower the effective tax rate from 35% to 25% could lift 2018 EPS estimates from $140 to about $150. And with the S&P 500 currently trading at just 15X expectations of $150, it shows good potential upside for the broad market.

With all that said, I am confident in my prediction that there will be no recession or bear market in 2017. The charts are strong and the major indices continue to mark new all-time highs. Not a one-week or two-month high, all-time highs. Plus, their technical patterns are showing excellent support at key levels. That means that even if we do see a healthy pullback, the underlying strength of the market will keep stocks from correcting more than 10%-20%.

That alone should keep the bears in their caves this year and provide smart investors with some profitable opportunities. I don’t expect the market to go straight up – there will always be bumps along the way – but normal sell-offs will offer attractive bargains for anyone who’s paying attention.

3 Predictions for 2017

January 4, 2017, 4:09 pm

The Dow closed out 2016 with a bang and I believe the party will keep going in 2017. I’m sure we’ll have our fair share of surprises as usual, but the layout for the road ahead is clearer now than it has been in months. I wanted to take a moment to share my thoughts on how things could shake out as we wade into new uncharted territory.

Earnings Growth Takes Off

We saw significant earnings improvement during the third-quarter reporting season that broke a five-quarter losing streak and I believe it’s just the beginning. S&P 500 earnings will grow by double digits in 2017, helping spur a solid year for stocks.

There are a few factors that will contribute to this growth: The comparable estimates from a year ago are poor and therefore the numbers will show a solid rebound; sector improvement should continue for energy (which were a big hit to overall numbers in 2016) and financials (backed by higher interest rates that lead to better lending margins and a strong bottom line); and consumer activity is picking back up. Plus, wages should continue to rise and the employment picture remains solid. This leads to a trickle-down effect that spreads throughout the economy and to the bottom line of corporations.

Foreign Profits Come Home

One of the first orders of business for Donald Trump is giving U.S. corporations an incentive to repatriate the roughly $2 trillion in cash they’re parking on the books in overseas subsidiaries. Even if that money is taxed at 10% as the current proposals indicate, that’s an effective windfall of roughly two full years of profit for the S&P 500 coming out of the deep freeze and getting back to work. Every CEO is going to allocate the money differently: some will focus on share buybacks or extraordinary dividends to deal shareholders into the jackpot, while others invest the cash in research and development (R&D), mergers and acquisitions (M&A) or other organic approaches to growing their underlying business.

This could be the big nudge it takes to supercharge dormant innovation, boost productivity, unlock closed markets and take idling companies to the next level. And from there, lower corporate income taxes practically guarantee that profitability will keep accelerating in 2017 and beyond.

IPO Unicorns at Last

For years the flow of initial public offerings (IPOs) through the Wall Street pipeline has been slowing to a relative trickle of small deals from less well-known companies. But with venture capital firms’ investment calendars ticking over in 2017, many of the most hotly awaited Silicon Valley darlings – billion-dollar “unicorns” – may finally be coming to market to give early investors an exit. Social media messaging platform Snapchat has filed the preliminary paperwork to go public at a rumored $25 billion valuation, which would be the biggest U.S. tech deal since Facebook (FB) five years previously and the biggest IPO anywhere since Alibaba (BABA) hit Wall Street in 2014. Big data analyst Palantir, Airbnb and even Uber may also be planning their own market debuts over the next 12 months.

There you have it—just a few of my predictions for the next 12 months. I’m very excited about the opportunities that lay ahead, and I hope you are too! If there’s anything you’re thinking will happen in 2017, feel free to share in the comment section below.

Key Indicators Continue to Turn

December 19, 2016, 2:45 pm

We’re down to less than two weeks left in the trading year, and while stocks took a breather after last week’s Federal Reserve meeting, they are consolidating at new levels well above the pre-election worry. The S&P 500 hasn’t dipped below 2,200 all month while the Dow hovers within 1% of 20,000 even on the slow days. The change in trading and tone has been remarkable these last five weeks.

From what we heard from the Fed when it raised interest rates on Wednesday, the increased optimism is justified. Unemployment is back where it was in the 2006-2007 boom years, and President-Elect Donald Trump is talking about job creation. By 2018, the Fed projects unemployment will be down to 4.3%, lower than at any point since the long dot-com revolution ran out of steam.

That’s significant. It means the next few years could finally become the Main Street recovery many have spent their adult lives waiting to experience. Others have probably forgotten what a true boom feels like or how markets operate when the macro environment cooperates. A flourishing economy means money is flowing fast in and out of corporate balance sheets. Profits swell, and the accelerated activity gives management new incentives to innovate and invest in their businesses.

The economy may not be booming yet, but the key indicators are turning at a healthy speed. Corporations are now on track to deliver the best sustained year-over-year growth since the 2005-2007 boom (omitting the stimulus-fed 2009-2010 credit crash recovery). Expectations are for earnings to be 10%-11% higher a year from now, which is historically enough to support at least normal stock market appreciation of roughly 10% a year, and occasionally something a lot more dramatic.

The last time corporate earnings recovered from a sustained stall was 2013, and stocks soared 30%-40% as traders rushed to buy the boom. This week alone we saw $21 billion pour off the sidelines into equity funds, and there’s still $2.7 trillion parked in money market accounts. We won’t see every cent of that go into stocks, but it doesn’t take a lot of added money to keep this rally alive.

Over the next two weeks, a lot of money managers are going to want to dress their books, too. That means dumping losers and grabbing the best-performing names to prove to clients that they’re on the ball. So if you’re planning on making some adjustments to your portfolio as well, look to see where momentum is already strong. Those are the stocks likely to outperform as we head into the New Year.

The Dow Eyes 20,000

December 13, 2016, 3:44 pm

Just when it looked like the market was set to take a break following its incredible post-election run, it bounced off support and climbed to yet another new all-time high today. Last week’s 3.1% gain actually marked the S&P 500’s best week since the election and put it officially in uncharted territory. The Dow is just a hair’s breadth away from hitting 20,000 for the first time ever, and even the small caps and technology names are joining in the rally. Both the Russell 2000 and the NASDAQ finished last week at their highest levels ever and continue to look strong now.

At this point, it’s extremely difficult to come up with reasons to be negative toward stocks heading into the final weeks of the year. However, I did find the cover of this week’s Barron’s issue interesting. It read, “Get Ready for Dow 20,000.” Any time the major financial publications start touting the market, focusing on the new highs and featuring ultra-bullish commentary, it does scare me a little. The conventional wisdom is that when the masses finally start to agree that stocks are the place to be it can suggest that a bull market rally is long in the tooth.

While hitting that number on the Dow doesn’t have any true technical meaning, it does have psychological importance for investors. The Dow isn’t the benchmark used by the majority of folks, but it is still the lead on the evening news that most investors watch. And when the big story is “Dow 20,000,” it will catch the attention of the weekend warrior investor and bring a new flood of money into the market.

That’s one thing I’m very pleased to see: there has been major change in the overall attitude of investors. And one way to help propel the economy (and by default the stock market) is to boost the average American’s confidence, leading to more entrepreneurs, more jobs and more spending.

Economic numbers had already started improving prior to the election, and that trend has continued in the month since. The latest consumer confidence reading from the University of Michigan came in at the best level since January 2015. It was a big increase from the October reading, which was at one of its lowest levels since 2014.

The ugly campaign was one reason for the pessimism, but clearly more than just the end of the election is contributing to the dramatic jump in confidence. It doesn’t really matter whether it’s the potential of what President-Elect Donald Trump can bring to the economy and Americans or something else. What is important is that the return of confidence will be a major catalyst for the market to continue its climb in 2017.