Investment Strategy: “Stealth Bull Market?”

The call for this week: Believe it or not, the McClellan Oscillator is not overbought despite last week’s rally. And as Barron’s wrote in today’s edition:

If history is any guide, the stock market should have a decent 2018 second half. Research outfit Bespoke Investment Group ran a correlation of the closing prices – through July 11, of the S&P 500 to every year since 1928. Statistically, just two years correlated strongly with 2018: 1942 and 1980, when the rest of the year was up 11% and 15%, respectively.

Also, according to uber-smart Nick Colas (DataTrek Research), “We went from a market where everything moved largely together to one where sector fundamentals began to matter more than where the S&P 500 was going.” And boy, do we agree with that! It is also consistent with our now over 18-month theme that we have returned to a stock-pickers market where active management should be favored over passive (indexing) investing. Also worth mention is what we have stated since mid-2015: the equity markets have transitioned from an interest rate-driven to an earnings-driven secular bull market. Indeed, this should be the 26th consecutive quarter where earnings reports exceed the estimates. And that, dear reader, is why the SPX surmounted the overhead resistance at the 2792/2795 level and is in the process of doing the same thing at the 2800/2805 resistance level. We were cautious in late January, since our models were calling for a February Flop. Subsequently, those same models called the undercut low of February 9, which we termed to be THE LOW, and have been bullish ever since, thinking the markets were going to trade-out to new all-time highs – many have done so – so, can the SPX and Dow be very far behind?! If you are looking for a list of stocks to buy, in addition to those mentioned in these reports, peruse this week’s Barron’s, and the front page headline, “Our Experts Return With 34 Investment Ideas,” many of which are favorably rated by our Raymond James’ fundamental analysts, or consider the Raymond James Analyst’s Best Picks List, which is outperforming the S&P 500 YTD. The long-term tale of the market was told when the SPX broke out above the triangle chart formation, which we repeatedly wrote about, on May 10 (chart 5 on page 5), suggesting the secular bull market is alive and still well. We suggest investing accordingly. This morning, participants should play for the usual Monday rally and the expected rally for this expiration week.  However, astute traders must wonder if much of the expiry week rally occurred last week on front running of the earnings reporting season. The DJIA closed 19 points above 25k, while the S&P 500 Index closed at 2801.31.  Therefore, the game should be to keep these indices above those psychological key threshold trading levels of 25000 and 2800, respectively. This morning, as we write at 5:07, the preopening S&P 500 futures are better by some 2 points as China’s 2Q GDP growth softens on slowing economic trade growth and France wins the World Cup.

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