“S&P 500 Hits All-Time High” blared the headlines on Monday. Yet, to my surprise, few investors noticed—my phone and email have been extremely quiet all week.
Obviously, I read the news and agree that today isn’t exactly the roaring 1990s. But the stock market dances to its own drummer—it looks six to nine months ahead, and it’s clearly seeing better things to come. I think it can continue!
1. First and foremost, my trend-following indicators for both the intermediate- and longer-term trends are both positive. Based on this alone, the odds favor higher prices in the weeks and months ahead.
2. The broad market is extremely healthy. I see this both in terms of stocks hitting new 52-week lows (fewer than 40 on the NYSE for all but a few days since February) and the number of stocks hitting new highs—this Monday saw the most new highs on the Nasdaq since last July!
3. The recent strength comes after a prolonged stock market correction. The major indexes suffered a 15% to 20% correction and, after the Brexit selloff, had made no net progress in nearly two years! After so much back and forth, newly positive stock market trends and participation from the broad market typically carry more weight.
4. We aren’t simply seeing stocks go up—they’re going up with rare power. Following Brexit, there were two straight days where more than 90% of all NYSE stocks were up and the S&P 500 was above its 200-day moving average. That combination has occurred only three other times since 1965! In the 12 months following those prior signals, the S&P rose 21%, 34% and 26%.
5. Another study: The S&P’s new high on Monday was the first in more than a year, yet during that year, the S&P never fell 20% from its high. That’s happened three other times since 1946; on average, those three instances saw the market rise 22% during the next year.
6. One last study: Looking at the daily advances and declines on the NYSE during the 10 trading days ending Tuesday, advances topped decliners by more than 2-to-1. That’s historically unusual and, in the past, has always portended higher prices during the following six to 12 months.
7. All of these positives are coming amid apathetic investor sentiment. According to the Investment Company Institute, about $175 billion has come out of domestic equity funds and ETFs since the start of 2015; meanwhile, $130 billion has gone into bond funds and ETFs during that time. There’s a lot of buying power still on the sideline!
8. Interest rates have fallen through the floor. Sure, some of this is due to economic worries, but it’s a positive overall, both for the stock market (lower discount rate on future profits) and the economy (boosting housing and some construction sectors at the very least).
9. The news on the U.S. economy is encouraging. Two weekly leading economic indexes (from ECRI and RecessionAlert) are growing at their fastest rates in a year or two. That doesn’t mean we’re about to boom, but it does indicate the credit crunch-induced slowdown is behind us.
10. Lastly, looking at the market’s very big picture, I think the odds are great that we’re still in the early stages of a mega bull market (the S&P 500 made no progress for 13-plus years, then broke out on the upside in mid-2013). Thus, the market’s latest upside breakout should mark a continuation of the newer multi-year uptrend.
A New Leading Stock to Watch
So what should you do given all these bullish factors? Buy strong stocks! One name that has just broken out is NetEase (NTES), a leading Chinese online game company, which also does good business in advertising as it’s a leading portal.
Here’s what I wrote about the stock in Cabot Top Ten Trader on July 5:
“NetEase, a Chinese web portal that does enormous business in the online game business, has been featured often in Top Ten, racking up 16 appearances before today. The reason is simple: NetEase has a dominant position in Chinese online games, on both PCs and mobile devices, and it offers a huge lineup of games, both licensed (like World of Warcraft, which is exclusively licensed to NetEase from Blizzard Entertainment) and developed in house (like the hugely popular Fantasy Westward Journey). NetEase is also the largest free email provider in China, and that service, plus mobile apps, social interaction platforms and e-commerce services, gives the company a huge base for ad sales. Revenue growth has soared from 15% in 2013 to 90% in 2015, with more than three-quarters of 2015 revenue coming from online game services. NetEase’s Q1 results kept the ball rolling with 108% revenue growth and 79% earnings growth. Earnings are forecast to increase by 25% this year and 15% in 2017. Institutional ownership of NetEase stock has been on the rise, but shares still trade at a relatively restrained 18 P/E. NetEase also has $4.4 billion in cash and cash equivalents, which is important in the merger-and-stake-building atmosphere of China’s internet giants. NetEase stock also pays a useful 1.3% dividend yield. Q2 earnings are likely out the week of August 10.”
To get my constantly updated advice on NTES and all of the market’s strongest stocks, you should consider subscribing to Cabot Top Ten Trader. Now is a great time to get on board as the bulls finally take control of the market. Get more details here.
