Fed’s Patience Puts Bulls In A Hurry

U.S. stocks found support once again last week and rallied on strong volume. Of course, the main catalyst was the FOMC policy statement on Wednesday that maintained its dovish language with a pledge of considerable time before raising the fed funds rate and adding that it would be patient as it begins the process of normalizing monetary policy. The result was yet another classic V-bottom. Ho, ho, ho. Say hello to Santa Claus.

In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.

Market overview:

For the week, the S&P 500 had a total return of +3.4%, led by a huge +9.7% bounce in beleaguered Energy sector. Basic Materials also looked strong with a +5.0% rally. For the year, the S&P 500 is up nearly +12% through Friday. And then on Monday of this week, the S&P 500 logged a new closing high, although the intraday high from December 5 still stands. Last Thursday’s big move resulted in a 421-point gain for the Dow Jones Industrials, which was its best one-day performance in three years, and the 709 points totaled on Wednesday and Thursday was its best two-day performance since 2008.

With Santa lurking on the horizon, bears have run for cover from the charging bulls. Moreover, Fundstrat reported that 71% of active fund managers are trailing their respective benchmarks, which would be the worst such percentage since 1998. So, they needed to do some catch up in accumulating U.S. equities. Notably, 1998 closed with a similar end-of-year rally. Also, this is the time of year in which many companies announce increases to their dividend payments. And don’t forget, this year’s IPO market has been the busiest since the crazy days of 2000, with 273 new IPOs (compared with 406 in 2000) and $85 billion raised (vs. $97 billion in 2000).

Crude oil has fallen -48% below the June highs, so it’s not surprising that the Energy sector led last week’s big rally. At current levels, there is more upside potential than further downside and a solid long-term risk/reward profile. And given the surge in insider buying, company executives seem to agree. Nevertheless, some prominent London hedge funds have been adding to their short positions in European companies with the highest sensitivity to falling oil prices, so not everyone thinks the bottom is in.

In desperate response to plunging oil revenues and the resultant plunging ruble from capital flight, Russian president Putin jacked rates by +6.5% up to 17%, thus providing the intense pressure that economic sanctions could not. (And the timing of President Obama’s move to normalize relations with Cuba probably was related.)

Nominal GDP is up +4.0% over the past year. The Conference Board Leading Economic Index has shown steady improvement and gaining momentum all year. And as we complete Q3 earnings season and look ahead to Q4 reports, sell-side analysts are anticipating EPS of $29.92 for the S&P 500 companies, which is an increase of +5.5% from Q4 2013, and total 2014 EPS growth is expected to come in at +7.5%, compared with +4.5% for 2013. This would be the best earnings growth since 2011’s +14.3%.

With a patient and friendly Fed providing ongoing tailwinds, strong GDP growth should continue into 2015 and beyond, which should propel equities to further heights, although the future for long-term bond prices is not so clear. Although the near-term will likely provide a flattening yield curve, eventually economic health will demand higher long-term rates and a steeper yield curve.

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Disclosure: The author has no positions in stocks or ETFs mentioned. The materials available from us are published solely for informational purposes. They are not to be construed as advice or ...

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