There are a lot of good trades to be had in this market, but the vast majority consists of momentum opportunities. It’s difficult to find stocks right now that fit the buy-low/sell-high investment strategy, because the market’s moved so much so fast. If you’re a trader, you must be liking the action. Everything from mining stocks to banks to technology is moving in this market, especially if the earnings news beats the Street.
I am still saying that I’d be long the market in the current environment, but I feel a correction is coming sooner than later. If you’re a risk-capital speculator, you still can’t beat the mining business. The cash is just tumbling into these companies, because spot prices are holding up so strong. I also still like select U.S.-listed Chinese businesses. There’s just so much in the way of economies of scale with Chinese companies that I wouldn’t have a speculative portfolio without a few of these names. The domestic Chinese equity market has been in the doldrums for quite a while and I’m betting this is going to change this year.
I remain surprised by the price strength in equities. I attribute the performance partially to a lack of alternatives for global investors. Fourth-quarter numbers are good, but they’re not out of the ballpark. I actually anticipated more of a selloff in the broader market, because investors already bet on a solid fourth quarter. They bid up shares in anticipation of the good news. It’s possible the current action is just the leftover positive sentiment.
To keep an eye on this market, you’ll want to follow your benchmark stocks. I always follow UTX, CAT, HPQ, and DD as a matter of habit. I also think the transport sector is the key indicator for the broader market. The railroads are particularly important as a subsector.
The S&P 500 Index is trading just under 1,300, which is almost double the March low set in 2009. By any measure, this is an incredible recovery. From my perspective, 1,500 on this index represents a level in the broader market that you can say is an all-time high. This is about 15% higher from the current level. Frankly, I don’t think we’ll get there without a major correction.
The stock market is due for a correction, because share prices have been running strong for quite a while. This means that investors have to be as nimble as ever. For speculators, it definitely means that you’ll want to be able to cash out very quickly. The S&P 500 has been going up in almost a straight line since September. Eventually, it’s going to correct and I think there’s a real possibility it will do so with the same fervor it did last spring. This doesn’t mean that the game is over; in fact, I think the market needs a meaningful correction. It would be a healthy development.