Well, isn't that better?
Stocks, commodities, and other risky assets are blasting higher on Tuesday thanks to a batch of good economic data. Inflationary pressure -- one of the main reasons for the market selloff over last the last two months -- is beginning to abate thanks to lower energy prices. Retails sales were better-than-expected. And inventories remain very tight, setting the stage for a production rebound in the second half of the year as businesses restock their shelves as the economy reaccelerates.
This is a welcome change of pace after the S&P 500 lost 7.7% from its May 1 high and settled into one of the worst oversold situation in decades. Breadth is blowing out, with the NYSE on track for best up day since the September through May uptrend, fueled by Fed stimulus, first got started. By all indications, the rebound is the real deal and should continue. Here's why:
For one, a rebound was overdue. Based on the closing TICK indictor that compares the number of stocks on upticks vs. downticks as the market closes, the Nasdaq is recovering from its most oversold level since 1999. That's a massive amount of sustained selling pressure that was unlikely to be maintained in an economic environment that's still improving as I believe it is.
Indeed, the other times that this indicator has been heavily oversold has been associated with market turning points -- as shown in the chart above courtesy of SentimenTrader.
Also, the Dow has just ended six consecutive weekly declines. Since 1900, there have only been five other times this has happened while the index was above its 52 week average. Four out of five rebounded during the next week and the next month.
And finally, just 18% of NYSE stocks are above their 50-day moving averages. Such a deeply oversold condition hasn't been seen since last July.
The catalyst for the rebound is less bad economic data and some healing in the credit
markets -- where mortgage-backed securities and high-yield debt has been hit hard over the last two weeks. The iShares High-Yield Corporate Bond (HYG), which suffered its worst-nine day selloff since the Irish bailout fiasco back in November, is posting its best one-day gain today since the jump out of the March low.
Back in April and May -- when bullish sentiment abounded and investors weren't worried about double-dips -- economic data was increasingly missing elevated expectations.
As a result, stocks moved lower as growth forecasts were cut. Visually, you can see this in the way the Citigroup Economic Surprise Index plummeted in the chart above, a development I covered repeatedly during that period as I warned of trouble. The index is stabilizing now as the data start to firm up again.
Things have changed now. Sentiment has become overly pessimistic as investors price in a new recession -- something that is still at least a few years away. I'm looking for this week's data heavy calendar to be an incremental positive for stocks as we get evidence that inflation is being held at bay and the specter of stagflation is passing.
I've recommended that my newsletter subscribers focus on financial stocks and short positions against Treasury bonds. Attractive ETF plays include the ProShares UltraShort Treasury (TBT) and the KBW Capital Markets ETF (KCE).
For individual stock picks, I like transporter FedEx (FDX), Russian steelmaker Mechel Steel (MTL), and oil services provider Schlumberger (SLB). All were found with the help of technicals screens developed with Fidelity's Wealth Lab Pro back testing toolset which you can find here. (Editor's note: Fidelity sponsors the Investor Pro section on MSN Money.)
Disclosure: Anthony has recommended TBT, MTL, and SLB to his newsletter subscribers.
Check out his new investment advisory service, The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.
The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. Feel free to comment below.
Anthony, some analysts are great at predicting bulls. Some are great at predicting bears. You’re a “rara avis”, you have an impressive track record predicting both. Hats off to you!
However, in the two years I have been reading your columns, you have never commented on the decline of American competiveness. Competitiveness translates into economic expansion and higher standard of living.
If you factored that loss into your long term views, wouldn’t you be as terrified as some of us are?
I've been following Mr. Mirhaydiri's post for some time now and find them to be extremely helpful in moving my 401K money from more liberal markets to more conservative holdings and back again on his recommendations. So far I have been able to keep my 401K intact with small gains the past month. Now I have put 50% of conservative funds into MidCaps as a test of the waters. If all goes well, I will add to it. No one can take just one person's word for what the economy will do, but to have Mr. Mirhaydiri as one of those I follow, I think I have gained. Which is what this is all about.
In my Self Directed IRA, I have taken out volatile stocks and put money into high dividend payers and a few Small caps that I think should do well with very little downside. Overall so far it has worked. If I felt Mr. Mirhaydiri was an idiot, I would not read what he said anymore, nor waste my time to comment on his condition. I'd find someone else that fit my goals.
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