INSIGHTS

On February 10, 2012

Peroni Report - February: On The Edge of Something Big?

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DJIA:  12890.46

If you have the feeling that the stock market is on the edge of something big (on the upside), there may be good reason.  Last year’s fourth quarter embodied the technical and psychological characteristics indicative of a pivotal point for stocks.  Volatility contracted steadily with the CBOE Volatility Index (VIX) falling precipitously during the period; under-performing sectors such as financials, home builders and building products stocks bottomed and rallied in a technically convincing manner; and trading swings were contained within a more identifiable uptrend.  In general, the market simply refused to stay down for long.  Trading in 2012 has begun in a manner that has essentially crystallized the burgeoning technical improvements from the previous quarter.

The bullish features of this market are increasingly more evident through the brief and shallow retreats that have characterized trading over the past several months.  Sidelined investors have been presented with only brief windows of opportunity to step in.  Although the latest advance has been portrayed by a gradual staircase climb, it is my contention that a sidelined money thaw may be commencing and more capital could be earmarked for stocks.  Historically, a bull market is fueled by the potent elixir of accommodating monetary policy and better-than-anticipated earnings.  Interest rates are at historically low levels which is further complemented by one of the most transparent Federal Reserves in memory.  Fed Chairman Ben Bernanke has offered a timeline for these low interest rates (late 2014) and has further promised fair warning before rate increases are actually implemented.  In an investment environment that has been burdened by so many uncertainties this could prove a powerful tailwind for equities.

Most importantly, it is my contention that there is budding recognition among growing numbers of investors that the market’s resiliency and persistent uptrend is for real.  That is, the bullish underpinnings of the advance can no longer be easily dismissed as an aberrant trend.  Deciphering the market’s primary modus operandi no longer requires the looking glass of a seasoned market soothsayer to substantiate.  What began as a subtle pattern with the initial identification and recognition of opportunity on the part of the non-institutional participant has now broadened considerably.  Large block net money flows are bolstering rising trends in numerous stocks representing the broad and diverse leadership that has prevailed in this market cycle from its start in 2002.

In last month’s PERONI REPORT, I cited a technical clearing in the stock market above 13,000 and at this writing the DJIA is now closing in on that level.  But, this tier of resistance could prove difficult very near term with stocks moderately overbought and the VIX at highly oversold levels.  Still, I believe the market’s technical posture is such that it should continue to withstand headline news from the Euro Zone over the short run and prevail on the upside with the possibility of nearing my yearly target (13,500 – 14,000) by the end of the first half of 2012.

From last October’s lows to its recent highs above 12,900, the DJIA has logged a 24% gain.  While there is a case to be made that the market is somewhat overbought, the price architecture of many stocks presents a constructive outlook with the continuation of an attractive longer-term risk/reward ratio.  The reason for this may be the market’s ongoing ability to address short-term price excesses in an orderly and sector rotational manner.  One of the bullish features of this market is that there is a good balance in performance among the leading industry sectors.  For instance, agriculture had been a leading sector following the market’s lows after the financial debacle.  But, stocks in the sector generally consolidated through much of last year.  I believe that the consolidation was completed in the fourth quarter and that agriculture can reclaim its longer-term leadership.  Numerous stocks in the sector have exhibited good relative strength recently and several stocks have begun to breakaway from downward or neutral trends.  The agriculture sector has out-performed the S&P 500 Index year-to-date and is technically poised for further improvement.

 

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