If the U.S. stock market is going to advance in any meaningful way, then it’s going to have to do so based on domestic economic news, to the exclusion of what’s happening in Europe and China. The eurozone debt crisis is a very real risk to the global economy and so is China’s declining economic news, but, at the end of the day, the only way the U.S. stock market is going to go up is because of domestic fundamentals.

The stock market’s been looking for a reason to go up and, while some economic news lately reveals a positive trend, the numbers still reveal much lower-than-usual levels of business activity. It’s going to take a number of quarters yet for the real estate market and employment to balance themselves out. But even so, any uptick in economic news will move share prices markedly higher—institutional investors are chomping at the bit. (See If Europe’s Fixed, Stocks Should Resume Their Upward Trend)

Trading action now is also accentuated by relatively low volume, which always occurs around the end of the year. There’s also a fair amount of portfolio posturing that takes place among institutional investors and this has a tendency to skew share prices. You can expect big price swings over the next few weeks.

A key point in my mind is 1,200 on the S&P 500 Index. If this main stock market index can keep above this level, then I would say it is holding up quite well all things considered. The sentiment is there for rising share prices and what this market really needs is more economic news confirming an uptick in business activity. With large corporations still saying that business is pretty good, my bet is that the fourth quarter will reveal quite an improvement in gross domestic product (GDP). This doesn’t mean that the trend won’t change next year; only that some pent-up austerity has been let out in this latest quarter.

In spite of the frustration stock market investors must be feeling, it’s only been two and a half years since the low set in March 2009. What transpired late in 2008 and early 2009 can only be described as a complete and total breakdown in capital markets. In my view, we are extremely lucky to be where we are considering the very poor health of financial institutions at the time. Economic news since then hasn’t been very rosy, but the shock of the subprime mortgage meltdown was so severe that I’m thankful the economy isn’t in a full-blown depression at this time. The stock market might still be experiencing a gigantic “rolling over” in its long-term trend, but it did the same thing from the mid-60s to early 80s. This was a difficult period for equities and the performance of the S&P 500 Index over the last 11 years has been quite similar.

Like I say, any upward price momentum in the stock market must have more positive economic news to be sustainable. Domestic investors have been so focused on Europe and China lately that their attention has left the U.S. stock market fairly valued and that’s the great opportunity we have before us right now. Because stocks aren’t overpriced, any positive economic news will translate into positive trading action in the near term.

Throw bad news at this stock market…it doesn’t matter…the assault on Dow Jones 13,000 continues its move ahead.

Yesterday was another big upside day for stocks despite a series of what I believe were negative economic news reports.

Bloomberg ran a story saying that a deficit-reduction plan gaining acceptance amongst members of the U.S. Senate would result in the end of preferred tax treatment of capital gains and dividends. This type of news would usually rattle stocks.

The Conference Board reported that its U.S. leading indicators rose in June at a pace of 60% below May. The Labor Department said that initial jobless claims rose by 10,000 in its latest reading. All negative economic news—that’s becoming the usual backdrop to rising stock prices.

Finally, the Atlantis ended the U.S. space shuttle’s 30-year history Wednesday. Where will the 9,000 people who worked for NASA get jobs now? House prices in Titusville, the closest town to Kennedy Space Centre, have already fallen 47% in five years (Source: Federal Housing Finance Agency).

In spite of how poor the economic news was yesterday, the stock market had only one mandate and that was to move higher. And this is exactly how bear market rallies work: bring stock prices higher, lure investors back into the stock market, and give them the false hope that all is well with the economy.

My prediction is that, by the time this bear market is over, a great number of investors will have been lured back into the stock market. As quickly as the bear brought stock prices up, it will bring them back down.

Sure, it’s very enjoyable to see the Dow Jones jumping 100 or 200 points in a day to the upside. But when we see drops of 100 to 200 on the downside, it gets very painful, as most investors play the upside of stocks, not the downside (short selling).

As I have been saying, enjoy the rally while it lasts, as this bear market rally’s life span is limited.

Where the Market Stands; Where it’s Headed:

There’s not much I can say that I haven’t said above. We are in a bear market rally in stocks that started in March of 2009. The rally, although long and tired now, will likely take stocks past Dow Jones 13,000.

In the immediate term, the dual forces of a government willing to go further in debt to spur the economy and a Federal Reserve ready to expand the money supply are overwhelming strong forces for the stock market.

The ramifications of a devaluation of the U.S. dollar, spiraling U.S.national debt, rising long-term interest rates, rapid inflation—the bear market will have us dealing with them on a date soon to be announced.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

When I first started PROFIT CONFIDENTIAL back in 2001, we were sending it to about 1,000 people; friends and customers of Lombardi Publishing. I was writing the issues alone. Today, we get as many as 2,000 people daily signing up to get PROFIT CONFIDENTIAL; it has gone “viral,” as they say.

We never started out with the goal of becoming an Internet company like Amazon or Google. We’re just a group of stock market analysts and economists that like writing and sharing our ideas about the markets and the economy.

Writing a financial daily e-letter is not easy. I wake at 4:30 AM EST each day we have an editorial issue. George and Mitchell work late into the night getting their morning articles ready. Wendy needs to edit each issue first thing in the morning. Joey needs to insure the issues get out on a timely basis.

I love sitting down to write PROFIT CONFIDENTIAL each morning, because I believe we present a contrarian view on the markets, investments and the economy that our readers can truly benefit from.

Some of my friends ask how can you think of so many different things to write about, almost every morning, 10 years running? My answer it that, with this global economy, there is so much happening at any given time, there actually isn’t enough time in the day to write about everything and to present our views on all of it.

As you know, we offset the cost of producing PROFIT CONFIDENTIAL with advertisements for financial newsletters and services produced by Lombardi Publishing, a company I started back in 1986. With an MBA in International Finance (a CFP from years ago), and almost 30 years of investing experience, I’m often asked to write financial plans for individuals. I’ve been offered as much as $50,000 for a financial plan, but I always decline, because I simply don’t have time. I do not want to take away from what we do here at PROFIT CONFIDENTIAL.

On these pages, we’ve had some great calls over the past decade. I would narrow it down to about five major forecasts that made a difference:

1. Turning bullish on gold bullion in 2002;
2.  Telling our readers to get out of the real estate market in 2005;
3. Being among the very first to predict a full-blown recession
   (we did that in 2007);
4. Turning bullish on stocks in March of 2009;
5. Dumping long-term bonds in the late summer of 2010.

We are blessed to have a stable of fine editors and analysts that have made these spectacular predictions and forecasts. We are as equally blessed to have so many readers flocking to PROFIT CONFIDENTIAL daily, because, without them, our predictions and forecasts (which are usually contrarian) would go unheard.

We thank you for taking the time to read the issues and we hope our ideas, predictions and forecasts are making an honest difference for you in how you invest your money and how you adapt to today’s quickly changing financial environment.

Where the Market Stands; Where it’s Headed:

The market has been up in seven of the last eight trading sessions. After being down most of yesterday, the market popped in the last hour of trading to give us a gain for the day. Someone wants this market to move higher.

Every day I wake up and ask: Is the rally tired? Is it over? After all, stocks are up about 80% since March of 2009. The year 2011 has been a great year to be invested in stocks so far. So what do I do? I just do what the market tells me. As long as the stock charts show rising prices, as long as the Federal Reserve keeps money easy: I don’t fight the trend; I don’t fight the Fed.

Until the market tells me differently, stocks are still a good place to be today. Short- to long-term, it’s a different story. I’m not bullish for the remainder of 2011. For me to really turn bullish on stocks for the entire 2011 year, long-term interest rates would have to come down, our deficit would have to be down to under a trillion a year, stock market advisors would have to turn bearish on stocks, and the Fed would need to raise the Federal Funds rate to one percent. I don’t see any of those things happening anytime soon.

The Dow Jones Industrial Average opens this morning up 5.7% for 2011.

What He Said:

“Overbuilt, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure—these are the bank stocks I wouldn’t own.” Michael Lombardi in PROFIT CONFIDENTIAL, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.

— by Mitchell Clark, B. Comm.

It’s a peculiar market for stocks right now, as economic news is
coming in worse than expected, yet investors are clinging to any small bits of good news. It makes me think that investor sentiment is getting stronger and there’s more upside ahead over the very near term.

You’re hard-pressed to find any news in the marketplace that is actually beating consensus estimates. For most companies, if they show they just beat the Street, it’s highly likely they’ve done so on previously reduced earnings estimates.

One small company that is the exception in this marketplace is ArcSight, Inc. (NASDAQ/ARST). I wrote about this company in early March and September of last year. This small company is in the business of selling information technology (IT) security products to corporate and government customers. I like this industry, because government customers are safe and pay their bills on time. In selling to government customers, once you get into the system and perform as required, a business can have a very successful stream of recurring revenues.

ArcSight’s products are mainly designed to safeguard customers’ IT assets, which include databases, applications, files, servers, desktops, and network devices. Some of the company’s customers include: Defense Information Systems Agency (DISA), the U.S. Securities& Exchange Commission, Verizon, the U.S. Federal Reserve, Xerox, McAfee, HealthSouth, Union Bank of California, Harris, Capital Blue Cross, and the U.S. Dept. of the Treasury.

In its latest quarter, ended January 31, 2009, ArcSight’s revenues grew to 36.4 million dollars, up from comparable revenues of 27.7 million dollars. Net income was a solid $5.1 million, or $0.15 per diluted share, up from net income of $2.4 million, or $0.09 per diluted share, generated in the same quarter last year. The company finished its latest quarter without any debt and with 82.9 million dollars in cash in the bank.

ArcSight is still a very small company, but its latest numbers beat consensus Street expectations and the business is about to achieve the critical size necessary to go after bigger accounts.

At the fundamental level, I think it’s very useful to consider the quality of a business’ customers when making investment decisions, especially when the broader stock market action changes. It’s not too difficult to figure out that investors would flock to a company like ArcSight in a recession. The company is growing profitably and, because of its large customer base of well-heeled government agencies, the prospects for continued profitable growth look good.

As an investor, you always have to be asking yourself questions about your positions and the underlying businesses they represent. Who are the customers? Who spends lots of money on IT security? Who benefits from new homeland security spending? Whose business will be more stable in a recession? All these kinds of questions are critical and they must evolve with the prevailing sentiment in the stock market and your portfolio.