Rotation of Strength: Continuing Opportunities as Market Averages Remain Sluggish

George Brooks |

Rotation of Strength: Continuing Opportunities as Market Averages Remain SluggishInvestor's first read        - Brooksie's edge before the open

Wednesday, February 22, 2012        9:13 a.m. ET

DJIA: 12,965.69       S&P 500: 1362.61

TODAY: We have had only one correction in a 12% run since October, which  would reasonably suggest another is in the works. There will be profit taking- great !   That’ll provide opportunities to buy stocks a bit lower.

But, while some stocks are slipping back, others will be moving up as sellers switch out of one into the other, i.e. a rotation of strength. Put another way, investors can be making  nice money even though the market averages don’t reflect it.  This means ETFs based on the market averages won’t offer the opportunities that a well-timed investment in an individual stock.

While Greece may yield Page One prominence in the news, Europe won’t. It will be there like a sore toe going forward until economic growth resumes.  Of course the pundits will express doubts that the second bailout of Greece will be sufficient and turn to the prospect of a need for a bailout  of Spain, worse yet Italy.

As if Europe doesn’t have enough problems, economic growth is still absent per February data, and growth is imperative if it is to emerge from its sovereign debt problems.

China is also struggling to renew its rapid rate of growth, but has undertaken measures to prompt it, starting with  a cut in bank reserve requirements.

   Bottom line:  Europe’s economies must grow. If they don’t we are faced with an even more serious euro-sovereign debt crisis than with Greece. Then too, without growth abroad, the U.S. economy will be limited. Right now, I don’t think the Street is worried about this.

The prime  driver of U.S. stock prices will be the U.S. economy, and it is expanding. Employment in the construction industry is increasing in face of a rebound in housing starts and homeowner improvements.  That’s big because that is an area where new hires are  more   likely to occur.

My Dec, 19 blog headlined “BIG Week: Economic Reports – Watch Housing” was greeted  by evidence of a rebound in Housing Starts  and Existing Home Sales, not a monstrous turn, but signs that this industry, so vital to our economic recovery is turning the corner.    I based that headline on common sense and  my experience with “extremes” in this business. Any industry so vital to an economy that has been in the dumpster for as long as housing will rebound.  It has too, it’s too basic to our day-in/day-out life.  Mortgage rates are historically low, house prices depressed and rents about par with the cost of owning a house.

The trend of  the stock market is the most accurate leading economic indicator we can access. What’s more, we get its report every day. Since its turn from bear to bull in early March 2009, it has had an incredible run in face of horrendous news here and abroad.

Where will the buying come from to drive it higher ?

   Two sources: One, sellers will reinvest.  New money will flow in from “safe havens” where it has been stashed to ride out the prospect of a global financial meltdown, but with next to nothing in terms of “return.”

How long will investors let it sit there ?

Money managers must generate a return for clients, and individuals have to be under huge pressure to start making money. So my answer is – SOON.

 

ECONOMIC NEWS: A light week for economic reports unless some surprise on the downside.

WEDNESDAY:

  • ICSC Goldman Store Sales (7:45 a.m.) a sampling of major retail sales (10% of total )
  • Existing Home Sales (10 a.m.) – December was up 5 pct. For third straight month which drew down the supply on the market to 6.2 million the lowest since 2006.

THURSDAY :

  • Jobless Claims (8:30 a.m.) – down 13,000 for week ended Feb.11 to 398,000, the 10th time in last 11 periods. Continuing claims were down 100,000 for week ended Feb. 4.
  • FHFA House Price Index – was up 1.0 pct. In Nov. after a drop of 0.7 pct. In Oct. Eight of the 9 census divisions were up.

FRIDAY:

  • Consumer Sentiment (9:55 a.m.) – early Feb. reading was down 2.5 pct.
  • New Home Sales (10 a.m.) – short of expectation in Dec. With a drop of 2.2 pct. , but follows three monthly increases of  Nov. 4 pct,  Oct. 1.7 pct., Sept. 2.3 pct.

Recent Posts:

Feb. 1   DJIA: 12,632 "Week’s Economic Reports Could Be The Springboard"
Feb. 3   DJIA: 12,862 "Investors Beating the Bullish Tune"
Feb. 6   DJIA: 12,845 "Follow the Money as It Exits Safe Havens"
Feb. 7   DJIA: 12,878 "Market Held Up By Sneaky Buying"
Feb. 8   DJIA: 12,883  "Is It Safe For Bulls to Come Out and Play?"
Feb. 9   DJIA: 12,890  "BIG Money Buying the Future"
Feb. 10   DJIA: 12,801  "Can a Greek Deal Be Accomplished Over the Weekend?"
Feb. 13   DJIA: 12,874  "Easy Does It! Some Selling Into Good News Expected"
Feb. 14   DJIA: 12,878  "Investors Should Expect “Market Churn”"
Feb. 15   DJIA: 12,780  "Market Churn to Include Brief Correction"
Feb. 16   DJIA: 12,904  "Another Snag in Greek Bailout + Long Weekend = Extended Correction"
Feb. 17   DJIA: 12,949  "Investors Establish Bullish Turf"
Feb. 21   DJIA: 12,965  "The Market’s Stall is Deceptive While Selected Issuers Could Hum"

George  Brooks

*Bloomberg.Com

**National Journal

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The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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