If Europe's Fixed, Stocks Should Resume Their Upward Trend

If Europe’s Fixed, Stocks Should
Resume Their Upward Trend

Thursday, October 20th, 2011
By Mitchell Clark, B.Comm. for Profit Confidential

Mitchell thinks this market has the makings of a meaningful 10% rally if investor confidence can be restored in Europe. Reduced expectations for the domestic economy are already priced into shares and so frankly are expectations for returns from the stock market. It’s still one big trading range for the stock market and, with no glaring catalyst for taking action, range-bound trading is more likely to prevail over the near term. The S&P 500 Index has done a good job in recovering over the 1,200 mark, but it is still finding technical resistance around 1,220. Any meaningful break through from 1,220 would be a very positive development for the index.

With mostly larger-cap companies reporting so far, third-quarter corporate earnings are coming in basically as expected. Corporate visibility for the fourth quarter and first quarter next year is more subdued, but most companies still expect solid growth, which in my view is an accomplishment. We are seeing a continuing trend that underlies strength in the economy—big companies are still able to increase the prices for their products and services without adversely affecting demand. This is a trend that’s been happening for several quarters now (see Third-quarter Earnings Season—Definitely Something to Look Forward to).

This is a stock market that wants to advance after being in correction for several months. Investors are getting tired of sitting on the sidelines, but have been shy in committing new monies to stocks due to all the investment risk in Europe. This combined with programmed trading-induced volatility has left many investors uninterested and afraid of the stock market.

As I’ve written, I think this market has the makings of a meaningful 10% rally if investor confidence can be restored in Europe. Reduced expectations for the domestic economy are already priced into shares and so frankly are expectations for returns from the stock market.

We are now in an age of austerity and an environment of reduced expectations about growth. Still, many large-cap companies are trading right at their 52-week highs and, with the exception of Apple Inc. (NASDAQ/AAPL)—which saw “iPhone” sales below expectations in the third quarter because consumers wanted to wait for the “4S” model that was just released—the technology sector is showing some real leadership. Until now, the technology sector has underwhelmed the investment community and it’s looking like the business of Intel Corporation (NASDAQ/INTC) is signaling a significant new upgrade cycle in retail computing. This bodes well for fourth-quarter technology earnings.

It is difficult to be a major buyer in a stock market that’s been so underwhelming lately. But, if you look at the charts (the S&P 500 Index, for example) the stock market looks to be experiencing the same kind of trading action in the spring of 2010. A major correction, which was then followed by a major new upward trend.

As I’ve said, once we get confidence back into the global system, the stock market could advance meaningfully. I’m hopeful it will do so this quarter, going into 2012. While corporate earnings growth isn’t robust, it certainly is respectable and, with the stock market’s valuation so reasonable, a resumption of the stock market’s primary trend is a real possibility.

Next Post: Tech Earnings: Looking Darn Good
Previous Post: Strong Corporate Earnings and the
Bear Market: How it Will Play Out

Tags: corporate earnings, stock market

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Mitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.