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October 22, 2012

Is Stock Market Still Bullish?

By Jim Fink via Investing Daily

Washington D.C. may not be one of the capitals of high finance like New York or London, but we get our fair share of stock market seers. Last night I attended a talk at the Washington Association of Money Managers (WAMM) by Tim Hayes, Chief Global Investment Strategist at Ned Davis Research (NDR). NDR has been around since 1980, with Hayes around almost as long, having jumped on board in 1986. Hayes holds the Chartered Market Technician (CMT) designation, which means his specialty is technical analysis (i.e., chart reading and investor sentiment).
In other words, if you’re interested in economic projections and fundamental analysis of individual stocks, Tim’s not your man. But he’s got a great track record on a macro level for predicting the price direction of the overall stock market, as well as industry sectors, both in the U.S. and abroad and is worth listening to. NDR also recommends individual stocks, but its track record on stocks is middling and is nowhere near as impressive as its macro market predictions.
Back in July in my article entitled Is the Stock Market Ready to Rally, I mentioned that Mr. Hayes was predicting stock-market strength in the second-half of the year and he sure was right! The S&P 500 was trading at 1,355 back then and subsequently rose as high as 1,474.50 (8.8% higher) before settling back down to its current level of 1,433. In 1996, Hayes won the prestigious Charles H. Dow Award which is sometimes called the “Nobel Prize” of technical analysis. Another NDR chart reader won the same award in 2009, so if you believe in technical analysis, NDR is the place!
With the introduction out of the way, let’s cut to the chase: where does Tim Hayes see the stock market going now? His conclusions are as follows:
  • The cyclical bull market (4-6 month outlook) in stocks remains intact and a test of the 2007 market highs is “likely.” For the S&P 500, that means testing 1,576 (143 points higher than now).
  • On September 10, 2012, NDR upped its recommended percentage of stocks in its asset allocation model to the maximum-permissible 70% (55% is neutral). The firm only changes its stock allocations two or three times per year, so its bullish outlook should last at least for the remainder of 2012 and the first couple months of 2013. Hayes’ one caveat: failure by the U.S. government to resolve the fiscal cliff could cause a scary 15% to 20% correction sometime in 2013 (similar to what happened in 2011).
  • The secular bear market (10-20 years) in stocks remains intact but “major reversals could soon be evident.” Hayes’ intermediate-term outlook (1 to 3 years) is a bit hazy but he sounded pretty confident that the secular bear – which has been in effect since 2000 – should end no later than the 2014/15 timeframe. Once that timeframe is reached, get ready for a “stock blastoff.”
On relative attractiveness of global assets, Hayes and NDR favor:
  • Growth over value
  • “Risk-on” consumer discretionary and information technology over “risk off” utilities and telecom services.
  • Commodities remain in a “secular uptrend” which favors stocks in commodity-based currencies like Canada and Australia.
  • The U.S. and Pacific (ex. Japan) stock markets (both overweight) over the U.K, emerging markets, and Euro Zone (all equal weight). Hayes is especially bearish on Japan(underweight).
Interestingly, NDR’s six-factor equity allocation model actually signals that emerging markets should be overweight, but Hayes is keeping the emerging markets at equal weight until he sees some technical evidence that the Chinese and Brazilian markets are beginning to outperform. He noted that the Chinese market, in particular, has been in limbo-land this year awaiting the Chinese government’s 10-year “changing of the guard” on November 8th at the 18th Communist Party Congress. Hayes pointed out that the Chinese stock market rose six-fold in the five years following the last time the Communist leadership changed hands in November 2002 at the 16th Communist Party Congress.  Hmmm…could November 2012 mark a similar blast-off point for Chinese stocks?
All in all, a pretty bullish stock market outlook both short term and long term with a potentially choppy intermediate term.
Courtesy Jim Fink at Investing Daily - profitable advise for smart people (EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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