Sometime in the not-too-distant future, the Federal Reserve will start removing the economy’s training wheels, aka “quantitative easing.”
While many experts believe that this bond buying stimulus is largely responsible for the stock market rallying to new all-time highs this year, the fact remains that other forces can sustain the rally longer and farther than most imagine.
Let’s look at 5 of these forces and then a targeted way to play them to beat the market for the rest of the year…
1) Economy Sound, Bright Spots of Momentum
GDP trends may not be anything to jump up and down about, but the “muddle-through” economy has done just fine since the Great Recession. It turns out that the “not too hot, nor too cold” 1-2% growth is working for lots of sectors and industries.
Take the housing recovery. Prices have bottomed, investors are competing for all kinds of units and builders will probably have a hard time keeping up with demand in some markets.
This has been the missing piece of the jobs recovery, and one look at the employment trend will tell you there is a building momentum in the construction industries. The knock-on effects spell expansion for other strong sectors like Financials and Consumer Discretionary.
Can the US economy survive without QE? Most economists and strategists think it can. We may not be on our way to 4% GDP soon, but just imagine what happens when we hit 3% next year.
2) US Earnings and Revenues Growing Despite Global Slow-Down
There are two undeniable facts about corporate America right now. First, we keep hitting records in profits year after year since the recession. Second, corporations are flush with record cash.
Yes, they are hoarding that cash because they don’t ever want to be caught with an empty piggy bank in a downturn like 2008 again. But it is still being used for spirited M&A activity and represents a deep savings account for potential investment.
More . . .
Big funds and pension plans try hard to keep others from spotting their key moves too soon. They need time to go all in, drive up the prices, and make big profits in any market condition.
Until now, you could only catch early hints of their moves if you had the time, will, and expertise to comb through obscure SEC filings. Today, Zacks shows how to get in at the first sniff of the best “smart money” stocks, and then stay for the full profit ride.
As long as corporate confidence is steadily rising and jobs are expanding, capital expenditures will keep trickling in to grow revenues. And portfolio managers are banking on that cash flow finding its way into their companies’ top and bottom lines.
3) PMs Have Models and They’re Not Afraid to Use Them
Ever since macro worries from Europe, China and Washington were forgotten about late last year, portfolio managers have had a newfound psychological freedom to do their job: get fully invested. And they’ve been “heads down, picking stocks” with a fury.
Basically, they take economic forecasts and company fundamental data and pour it all into quantitative models that tell them what they should pay today for a dollar of next year’s earnings.
From the top-down, the market is already starting to trade on simple math that looks like this: 2014 S&P EPS estimates of $110 to $115 X a 16 multiple = S&P 1,800 next year.
But not all PMs are ahead of the curve. In fact, many are still sorely “underinvested,” waiting for the next big pullback where they “promise” to put all their cash to work. Fortunately – for disciplined stock pickers that is – it doesn’t work that way. You can’t wait for the pullback on a bull train that keeps on rolling.
4) Growth Stocks Lead the Way to New Highs
What if my above 3 premises are wrong, or turn out weaker than I expect? While I’m pretty sure we are not headed toward recession, it’s still possible that growth slows back to stall speed. Or, that interest rates begin to rise quickly and cause a giant “reset” in investor expectations and allocations.
But these events do not necessarily release a bear market, not yet anyway. And even in a big 10-15% correction, there will be stocks that institutions are still accumulating for the next leg higher. What stocks are those?
Growth stocks, of course. These stocks can be more volatile than the average, especially if you are talking about small and mid-cap names in the range of $500 million to $5 billion market caps. But that’s where many “hidden” institutions are buying. And I have a way to follow them that I’ll show you in a moment.
5) Charts Are Strong Like Bull
Now if QE3 did make the market surge this year, then of course the charts look bullish, by definition. But there has also been widespread breadth to this rally.
Recall it was the small and mid-cap indexes, the Russell 2000 and the MidCap 400 – what I call “the other 2,400 stocks” – that led the charge in December and January.
These leaders are clearly not giving up their positions yet. And that spells good things for our strategy going forward.
Follow the Whales
In this environment where “stock-pickers rule and indexers drool,” you need a system to guide you and keep you disciplined. And we’ve been perfecting one for over a year now.
We built a custom screener that collects all of the SEC institutional filings and sorts through them for meaningful information. Then we match new buying by the “whales” of the market with the Zacks Rank.
The big money accumulates sizable positions of millions of shares in some growth stocks over a period of several months, sometimes years. When you can track this movement and combine it with the Zacks earnings momentum model, very good things can happen.
The Market Will Survive in a Tapering World
While I am calling for new highs near S&P 1750 this year, and a print of 1800 next year, the pace of stock market gains probably won’t appear as dramatic as it did in the first 5 months.
But hundreds of individual stocks will still see much more dramatic gains. You need a couple of aces up your sleeve to consistently find stocks like that and achieve better than average returns.
Join me in using a disciplined model that combines earnings momentum and following the “money trail” of institutional investors. I think you’ll enjoy whale-watching as much as I do!
A Good Way to Get Started
Presently, I am directing the Zacks Follow the Money Trader that tracks those institutional investors from their earliest filings to spot their best stock moves. We want to get in before they move in all their money, and before other institutions follow them. This initiative has beaten the market, nearly doubling it last quarter.
The FTM Trader monitors a vast, ever-changing database to detect the most promising institutional stocks, and then filters them down even further through our proprietary indicators. Right now we have only 9 stock picks that make the grade.
Kevin, a Senior Stock Strategist at Zacks, is a recognized authority in global markets and noted for predicting and tracking the movement of smart money. He provides commentary and recommendations for the Zacks Follow the Money Trader.