While stocks have moved into new multi-year highs, the lack of enthusiasm and volume is a concern if the bullish momentum is to be sustained. The question of whether the Federal Reserve has done enough to instill investor confidence in the market and economy’s stability, even if only for the near term, will play out in the coming months.
In the first of a new weekly interview segment with Craig Johnson, CMT, CFA, Technical Market Strategist of Piper Jaffray, we discuss whether stocks can continue to break into new highs, and what stocks could perform particularly well in this market.
EQ: The S&P 500 continues on its uptrend, breaking through into new highs, and about a quarter of the stocks on the index are making new highs as well. With that said, why are investors still hesitant to re-enter the market?
Johnson: This is similar to what we had seen before coming out of the late-1970s, and even coming out of the 1930s. The scars of the secular bear market ended up being so great for investors that they have a hard time reengaging the process. The scars right now on the backs of investors are very deep and very fresh in their memories, and they’re having a hard time pulling the trigger and reengaging. This is all part of the human psychology around the investing cycle. Most investors find it very difficult to buy stocks when stocks are down, and very difficult to sell stocks when stocks are up because they’re so tied up with the emotions inside the market. This is classic from what we’ve seen before where investors cannot reengage the investment process after major secular bear markets.
EQ: With the Fed’s announcement of a new unlimited QE3 program and providing open-ended commitment to supporting the economy, does that help to entice investors to come back in knowing that?
Johnson: The morning prior to the announcement, we wrote a piece that discussed the fact that one of the Fed’s primary mandates is to create stabilization in the market, and also to create jobs. But the reality is that the Fed was not going to do anything in its statements and actions to disturb the advance that we’ve been seeing off of the June lows. Clearly with the market up over 200 points since, it has clearly played out to be exactly right. I would just say for the big picture side of things is, what they’re ultimately trying to do is to get some confidence going for investors. If we can see confidence start to build again, that confidence will ultimately lead corporations to pull the trigger into reengaging in the hiring process.
The second step that will ultimately need to happen is on the fiscal side of the equation with Washington. Washington needs to do a better job of creating a certainty in the environment and investment landscape. You have concerns of healthcare policies and the fiscal cliff. We need to remove some of that uncertainty and create some certainty, and I think you’ll see corporations—which do have high profit margins—begin to pull the trigger and reengage. What we need ultimately is more good paying jobs. I think the Fed’s actions certainly help lead us to create that confidence, and eventually help lead to more job creation, which is their ultimate objective.
EQ: Your outlook for the market is on the bullish side, with price objectives for the S&P 500 to hit 1,500 in six months, 1,700 in 12 months, and 2,000 in 24 months. What do you believe will be the main drivers for these moves higher? Do you anticipate a lot of volatility during these periods?
Johnson: Bottom line, stocks don’t lie and right now the stock market is a great discounting mechanism, looking forward six to nine months. I will tell you right now, the economy is on a slow and steady climb, and stocks are really truly beginning to reflect that. As a technician and as a strategist, I listen to what Mother Market has to say. Right now, Mother Market is telling us that things are better than what people believe at this point in time, hence why they are having a hard time reengaging the investment process. Hedge funds this year have unfortunately had a very difficult year, on average underperforming the broader market. You see the long-only people certainly having a much better year at this point in time. But I would tell you that it’s the economy that is driving this and it’s on a slow-and-steady recovery, and stocks are truly reflecting that. I would note that almost one-third of the S&P 500 is close to breaking out to all-time new highs. I repeat, all-time new highs. That, my friends, is not bearish; that’s bullish.
EQ: Each week in your Technical Research report, you highlight actionable looking MicroGroups for the War Plan. Can you tell us the concept and methodology behind this commentary section of your weekly update?
Johnson: We look at every single stock on the New York Stock Exchange, Nasdaq and AMEX with a market cap greater than $25 million and a price greater than $2. We really take a top-down and bottom-up approach at thinking about the market. We’ve done extensive sector Microgroup and individual stock work looking at total return relative strength, looking at two-trend following methods, and putting those three pieces together to help us figure out what sectors, groups, and stocks we should be buying in the market place. We do that every single week and we’ve been doing that on a proprietary basis since the early 1980s. What we find each week is that simply getting in front of the best-performing sectors and staying out of the weakest relative-performing sectors has provided us with a very good road map on where we are and where we should be in the investment cycle, and where we should be placing our assets.
EQ: What were some of the groups that you liked the most and the least for this week?
Johnson: For this week, we really like what we’re starting to see with the relative strength improvement happening in the Financial and Technology sectors. Also Healthcare still looks somewhat interesting to us. So we see really improving strength in those particular areas. Some of those groups that look interesting include southwestern banks with stocks like Western Alliance Bancorp. (WAL), financial services like World Acceptance Corp. (WRLD), clothing manufacturers like The Jones Group Inc. (JNY), and data storage devices Fusion-io, Inc. (FIO). Also, some of the better looking stocks covered by Piper Jaffray are Applied Materials Inc. (AMAT), Digital Generation, Inc. (DGIT), General Motors Company (GM), V.F. Corporation (VFC), and The Western Union Company (WU).