Best stocks to invest in
The stock market is a dance. Sometimes the partners – the economy, earnings, and the Fed – are in harmony, as they were for a big chunk of the bull run from 2012 into 2015.
And sometimes they are wildly out of sync as the past year has shown with violent sector rotation and institutional distribution, weaker economic fundamentals around the globe, and an earnings recession driven largely by the energy meltdown.
Most investors are baffled about whether or not we are entering a bear market. But I can solve that puzzle easily for you: no economic recession = no bear market. The slow and steady “plow horse” economy looks like it will keep doing what it does best, muddling on through with only a 15-20% chance of recession.
Thus, there are just two questions you need to answer in order to decide if the bull market has found his legs again after this year’s “W-bottom” at S&P 1812, or if the correction must continue in order to force rich valuations back in line with fundamental trends.
Question #1: Are Investors Seeing the Bottom of the Earnings Recession?
The first quarter of 2016 is shaping up to see the biggest contraction in earnings since the Great Recession. Current estimates for the S&P 500 are calling for negative 9.5% “growth.” This will mark the fourth consecutive quarter of year-over-year declines.
And the slide continues as Q2 is already seeing earnings estimates slashed to reflect negative 4% “comps” for the index. And Q3 has slipped to just positive 2.8% growth. As I’ve been saying for six months, as long as these forward estimates continue to be in jeopardy, then the market remains over-valued according to this P/E math:
S&P index at 2000 (P) / 2016 aggregate EPS of $117 (E) = 17 times forward
The market’s trailing P/E is tolerable at 18-19 times. And institutional investors will even pay a 17 multiple for forward estimates that are on an upward trajectory. But you don’t pay 17X for earnings that are rolling downhill.
But what if those same investors – who, by the way, “have to buy” stocks with the money they are given to manage – what if they are looking at Q1 as being the trough of the earnings recession? If they are, then they will be buyers of the market now and on any dips back toward S&P 1950.
Because their base case is the one I already stated about a robust US economy, buoyed by a strong American consumer who has ample job opportunities. And it doesn’t hurt that the Federal Reserve still has the backs of the economy and investors too. More on that in the next question.
Answer #1: I am reevaluating my thesis since October that the current earnings recession makes the market more over-valued with each passing week and thus destined to make new correction lows to the S&P 1700-50 area for a more complete valuation re-set.
If large investors can envision the worst already and see light at the end of the tunnel, then you don’t want to stand on the tracks of that bull train. Instead, you want to tactically play the new trading range up to the June Fed meeting between S&P 1900 and 2100.
Continued . . .
Window Closing for Extreme Profit Opportunity
Zacks strategist Kevin Cook uses a new approach for wringing the most dollars from the coming market swing as the current rally reverses.
See his timely trades, then follow how he exploits both ups and downs with every weapon in the Zacks arsenal. The goal: Substantial profits in 1 to 12 weeks. Hurry – access closes Sunday, March 20.
Look inside his portfolio now >>
Question #2: What Message Did the Fed Deliver By Signaling Just 2 Hikes This Year
The Federal Open Market Committee (FOMC) surprised many investors and strategists this week with a much more dovish stance than expected. I always suspected that the “dot plot” projection of four rate hikes for 2016 was embedded with “implied easing” because all they had to do was reduce the probability of one or two of those hikes occurring and the economy and investors would feel like they just got a rate cut.
But I didn’t think they would be so eager to look so dovish, so soon. That’s what a manufacturing recession, driven by the energy implosion and other global threats, will do to monetary chieftains who don’t want the economy faltering on their watch.
The conventional wisdom is that if the Fed doesn’t hike 3-4 times this year, as our steady-as-she-goes “plow horse” would dictate, then they are obviously very worried about the US economy. Further tightening of financial conditions would only hurt more.
The Fed’s Got Your Back on 3 Fronts
But I think Janet Yellen and several other FOMC members are more concerned about three other factors that could potentially evolve into bigger problems for the US economy if antagonized by more aggressive rate “normalization.”
First is the global economic angst already washing over to our shores from Europe and Asia, impacting demand for US exports. And the direct transmission mechanism for this is the currency markets. While the European Central Bank (ECB) and the Bank of Japan (BOJ) take historic leaps in QE policy to keep the euro and yen weak, they threaten to make the dollar much stronger.
But the Fed couldn’t afford to fan the flames of their competitive devaluations by sounding hawkish and driving the dollar higher. They needed to move closer to the ECB and BOJ, not further away. The Fed isn’t fighting in the currency wars; they’re just adapting to them for the best interests of US corporations and households.
Second, “easy money for longer” helps out the oil patch and its incendiary cocktail of over-leveraged companies pumping crude like crazy to keep from defaulting on their junk bonds.
Third, the Chinese yuan devaluation process is long and slow. But when it occasionally jumps like it did last August, markets will panic. The Fed bought some more time to absorb that potential blow by keeping the liquidity pedal to the metal.
Answer #2: “Don’t fight the Fed” was never more true. The Fed is your ally, if not your friend, in the current macro storms. This week they proved they are still fully committed to supporting the US economy, despite global tremors, and especially during a volatile election year.
Given These Macro Drivers, What Opportunities Exist Right Now?
You now have the answers to the only two questions that matter currently. And I will continue watching the earnings estimate data closely to see if we could be building a significant bottom in the outlook.
I believe that’s what is getting priced-in and driving stocks higher. And that could mean new highs for the S&P this year, possibly by Q3.
But in the short-term, I am seeing a cycle top in stocks that should unfold when the last short-covering and late-bull chasing is over. The result could carry the market up to S&P 2080 and back down to 1920 in a matter of weeks. I am planning trades in energy, gold, biopharma, and the euro currency, as well as VIX-related positions, to take advantage of that next wave of volatility.
Here’s What to Do
A good way to take advantage of the next market swing is through a new portfolio I’m directing, Zacks Tactical Trader.
The key to our approach is flexibility. I’ll fire off every weapon in the Zacks arsenal to profit from the coming market downturn. Then later if the bull resumes as I predict, we can ride it to new heights.
Right now, I invite you to see the 5 live trades in my portfolio, but must emphasize that too many investors can’t be allowed to share them. Therefore, access must be closed to new investors Sunday, March 20 at midnight.
Learn more about Tactical Trader now >>
Kevin, a Global Market Expert at Zacks, is well noted for predicting and tracking the movement of smart money and calling market swings with remarkable accuracy. He provides commentary and recommendations for the new Zacks Tactical Trader.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Zacks Investment Research
– Best stocks to invest in