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Rally ahead! Or not?

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by Peter Switzer

Today I want to tell you why the S&P 500 index will break through the 1200-level by year’s end. And then I want to tell you why I could be wrong!

In a sense this story could be described as the opposite of an old cliché — up but not in!

In March 2008 before the rebound, the market was down but not out and the accumulation of good moves by world governments and central banks swung sentiment to the positive.

This all explains why the Yanks have been range trading since May this year but in reality it goes back to about October of last year and of course it has directly affected our market. There are reasons to buy but not enough and even though you can see reasons to be positive, there are reasons to be negative as well.

Buying opportunity?

The more adventurous are seeing now as a buying opportunity. The committed long-term investors have to buy — that’s their charter. However, the cautious are sitting on the sidelines in safe investments, so there is a lot of cash on the sidelines, which one day will head for the stock market.

I don’t know when this will happen but it’s why IBISWorld’s Phil Ruthven says he thinks the market could go up 45 per cent in one year some time over the next three years. When the reasons for fear falls are built the money will come — that’s the field of dreams on Wall Street for the bulls.

Positive September

A surprising development last night was the fact that the US stock markets were up despite industrial production numbers that didn’t impress. Also there were warnings from home builders that would not have helped confidence. I will get back to home building later.

There’s the view that September has been positive because traders need to get a positive result this year after being out of the money all year. However volume has not been good enough to take the S&P 500 over 1030 — it missed on this overnight.

If industrial production numbers had been better than expected then that level might have been breached as well as held. It didn’t happen and we now have to await a positive market mover.

Industrial production did rise but by less than expected and was down from July but experts say July was an inflated result for extraneous reasons. Then the September Empire State Manufacturing Survey fell from 7.1 in August to 4.14 in September, which was a long way from the forecast of 6.4.

However, you always have to be careful with one month’s figures — they certainly didn’t spook the market but they didn’t help market excitement either.

Level breaker

On a more positive note, Andy Bischel, CIO of SKBA Capital Management told CNBC he expects the market to break out and reach the 1200 level on the S&P by year-end.

“We’ve been through the worst news flows that we can see and we’re not headed for a double-dip,” he said. “And you [may get] the surprise that the tax cuts can get extended—that would be an enormous positive surprise for the market.”

I would throw in the 16 out of 17 times that the US market has risen after mid-term elections and that’s another reason that history repeats.

Double dip has begun

Against this, there are those who believe a US home price double dip has started!

Two reports out recently show prices are hovering for a fall because of oversupply and the end of tax credits that encouraged home buying.

Obviously this information didn’t hurt many share buyers today but one thing I know is that for a decent recovery out of recession, you need the housing sector to kick in early.

Once this happens, it gives consumers confidence and we’re off to the races.

Positive news needed

Possibly we overdid fear in May when European debt concerns surfaced and that could help the market up to a higher level by year’s end but we need some bigger, more positive economic news to create a stock market in a full-blown recovering US economy.

It might happen in one year over the next three years!

By the way, the S&P 500 finished at 1125.07 and still has 1030 ahead of it and only good news will be essential.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, September 16, 2010