Christmas Time: Light the Tree, Buy Stocks

Wednesday, December 01, 2010

Rockefeller Christmas TreeI'm back in New York and back at my desk after a nice, long Thanksgiving break. The market is on speed today with the Dow up 250 points right now after Monday's big intraday reversal marked a significant change in the action. It seems to me that stocks are primed for a Christmas rally to tack onto this year's mild 8% gain in the S&P so far. November was a healthy 4.4% pullback and buyers are back to start December. Overall I'm not all that concerned with the market itself but am focusing on individual companies as I wrote in mid-November.

Is the rally justified?

One of my favorite bloggers, Wade Slome over at Investing Caffeine, has a great post out titled "Another Year, Another Decade" highlighting the prominent undercurrents driving the market:
  • GDP Growth: You wouldn’t know it, but we have experienced five consecutive quarters of GDP (Gross Domestic Product) growth with a recently upwardly revised Q3-2010 growth figure to +2.5% (from previous +2.0% estimate).
  • Job Growth: Although the unemployment rate has stubbornly remained in the 9.6% range, the country has created more than 1million jobs over the last year, thanks to ten consecutive months of private job creation. We’ll find out more about hiring trends this Friday.
  • Record Profits: S&P 500 profits are on track to exceed the $88 peak profit earned by the index in 2006 (Thomson). Corporations may not be hiring in droves, but the cash is piling up for increased investment and pent-up hiring. Unprofitable companies generally do not hire.
  • Changing of the Guard: Regardless of political leanings, with Presidential re-elections only two years away and Republicans gaining control of the House, some common ground between the Right and the Left could be found. Specifically, gridlock is the default, but there is genuine potential for compromise on taxes, fiscal restraint, tax relief, and investment incentives with the aim of sparking job creation.
  • Holiday Cheer: Holiday sales got off to a good start judging by “Black Friday” (the day after Thanksgiving) and “Cyber Monday” – the day after Thanksgiving weekend. Sales on Cyber Monday rose +19.4% versus last year, according to Coremetrics. Traffic to retail stores and websites over Black Friday weekend increased by +9%, reportedthe National Retail Federation.
I think there's a lot to be optimistic about, especially as a trader/investor. With common sentiment seemingly still so negative, opportunities abound for those willing to believe in the recovery and find values. I've excluded the list of negatives here because there will always be negatives but the underlying currents remain very strong indeed.

Brandon R. Rowley
"Chance favors the prepared mind."

*DISCLOSURE: Nothing relevant.
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