Friday, July 22, 2011

Still Riding the Bullish Wave

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

I am going to spend my time this week staying with the theme from the past few weeks, my bullish forecast for the stock market. 

Although this phrase always applies, it’s certainly been an interesting few weeks, especially on the geopolitical front with the debt crisis deadline looming, Greece, Ireland, Spain and Italy along with the plethora of poor economic reports. 

Yet with all this being shoved down our throats 24/7 by the media, the major stock market indices are one or two strong days away from multi year highs. It’s been the epitome of resilient.

For the past month, I have leaned heavily on the bullish side of the argument for stocks. I won’t bore you with the facts, evidence and opinion, but my forecast flew in the face of conventional and generally accepted, just the place I am comfortable trafficking, in the minority. 

But to be fair, if I was going to be wrong, I laid the case out last week from a technical perspective.

The chart above from last week has been updated and remains an open possible scenario for the bears if the S&P 500 is able to close a few days below the neckline. Given the strength this week, it would be a long drop just to get to the line in the sand, let along pierce it. If and when the S&P 500 closes above the area labeled “right shoulder”, the head and shoulder pattern for the bears will be null and void, something I continue to believe will occur this quarter.
The other negative technical chart pattern can be seen below, the island top.  And like the head and shoulders chart, the island top is very close to breaching its own line in the sand, which would nullify the potential negativity of the pattern.
As I have already mentioned over the past few weeks, the Russell 2000 (small caps), S&P 400 (mid caps), high yield bonds and the Dow Jones Transports scored all time highs at the April market peak along with the Advance/Decline line, a cumulative measure of the number of stocks going up and down each day.

On the fundamental front, something I am certainly no expert in, S&P 500 earnings are growing faster than the S&P 500 index. That means the market is getting cheaper even though it is still rising.  We are actually seeing price/earnings multiple compression rather than the usual expansion. It is highly unusual for a bear market to begin with so many positives at a market peak.  
Taking a longer-term perspective, something I am not usually known for doing, the NASDAQ 100 continues to give off some very positive vibes. This index is made up of the 100 largest non-financial stocks on the NASDAQ and is dominated by tech giants Apple, Intel, Google, Microsoft , Oracle and Cisco. As you can see below, the index is quietly and without fanfare bumping up against fresh 10 year highs! 

Looking out even further gives you a sense of how much upside room there is before all-time highs can be seen. In case you forgot, the Dotcom bubble high from 2000 is another 100% from here. I remember quipping on Bloomberg TV that whatever high the NASDAQ was putting in wouldn’t be seen again in my lifetime. I certainly hope I live a very long life and will be able to see that peak eclipsed sometime in the 2020s or 2030s.

Last week I closed with:
'Given all the positives listed earlier against the negatives from the charts, the easiest thing to do would be to move to a neutral stance.  And maybe that means we are in for some sideways activity.  "Play it safe", if you will, with all the negative news from the debt ceiling debacle to Italy and Ireland and Greece.  But I have never been to one to seek the easy way out.  I continue to believe that the major stock market indices are going to resolve themselves to the upside and score new high closes this quarter.  And that's the way I plan to invest until proven otherwise.' 
And I still feel the same way now. The stock market has had a nice run this week and while it certainly deserves a rest, I think any pullback is a buying opportunity until proven otherwise. The first thing that would concern me is if the major indices closed below the low we saw on Monday morning July 18.
I hope you stay cool in all this heat.  Relief is on the way!
Feel free to email me with any questions or comments at
Until next time…
Paul Schatz
Heritage Capital LLC
Follow us on Facebook at and on Twitter  @Paul_Schatz

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