On Tuesday, I showed you how the market had flashed a strong “rebound” signal.
And as of yesterday, the S&P 500 Index has traded above a key support line – the 20-day moving average – for 13 straight days. That’s its longest “winning” stretch since November.
I also showed you how the market has lately remained above the 50-day moving average. That’s an even more bullish level.
Turns out, this “technical analysis” of the charts I examine every day caught the attention of Bill Patalon, the executive editor here at Money Map Press, and he sent me an email praising my report.
Bill is one of the best interviewers in the business, and I knew he’d be able “tease” out some more valuable details for you all – so I called him up.
And during that call, he got me to drill down on my analysis – and even got me to cough up a few “bonus” stock recommendations for you all.
One of them is a small-cap biotech that’s primed for a 25%+ run over the next year.
Reaching a Healthy Stage
William Patalon III: So, Michael… I’m following up with you here because of a pretty intriguing email chat we had about the direction of stock prices. You started with some “technical analysis” observations about the Standard & Poor‘s 500 Index… and used that to predict a big pop in share prices. Let’s start with that observation…
Michael A. Robinson: That’s great, Bill, glad to do so… What I said was that – at the close of trading on Tuesday – I’ve been watching a very nice trading range for the S&P. Tuesday, in fact, represented the 11th straight day that key index has traded above the 20-day line – the longest stretch this year.
BP: And by “20-day line,” you’re referring to the 20-day moving average for that index.
MR: That’s right, Bill. And this is an “EMA” – an exponential moving average smooths out the numbers in a way that gives me a better look at what’s really happening.
BP: So what does that mean… where do we go from here?
MR: Simply stated, it means the market has finally entered a healthy trading range. Here’s the thing that no one else is talking about. The EMAs covering 10, 20, 30 and 50 days of trading on Tuesday basically stacked on top of each other.
The means short-term and intermediate-term traders as a group believe the uptrend has legs – and they don’t want to miss it. I’ve been saying for weeks now that if you sit on the sidelines you might miss a powerful move.
BP: And what you’re saying here is that this prediction appears to be coming true.
MR: That’s exactly right, Bill. Simply stated, it means the market has finally entered a healthy stage. In fact, it’s actually even better.
As I see it… this could well be setting the table for something traders refer to as a “breakout” – a powerful, extended run-up in stock prices.
BP: How sure are you of this? Is there more you need to see?
MR: It’s good, Bill, it’s good. What I’d like to see right here is more sideways trading for a few more days. Then I’ll look for a pop.
BP: That’s a gutsy call… which our folks like to see. So tell us… just what is it that you believe is driving this action?
MR: Both Wall Street and retail investors are becoming convinced the worst is over. The market came under pressure on Jan. 4, the first day of trading this year, because of uncertainty over global growth and the collapse in oil prices.
At this point, investors are proving what I’ve been saying for weeks – that the market is greatly oversold… and that there are some terrific bargains out there.
BP: So you’re talking about the S&P 500 here. Does this translate to the Nasdaq Composite Index? In other words, does this translate to tech stocks – your forte – too?
MR: It does, Bill, it does. The difference among the EMAs is a scant 1.9% for the Nasdaq. And the Nasdaq is beating the S&P on the way back up.
BP: By a lot?
MR: By a lot. In fact, since the market bottomed Feb. 11, the Nasdaq has gained 9.5%. That’s 22.5% better than the S&P over the same period.
BP: What’s the “ignition point” for this?
MR: I believe it reflects a growing sense that growth in the United States – and globally for that matter – is stronger than what Wall Street expected back in January.
BP: What kind of a rally are we talking about here? Long in duration? Short and powerful?
MR: Honestly, it’s impossible to say, because we don’t have enough empirical data. But I believe it’s a blend of both.
See, we are in the midst of what I think will prove to be a generational bull market. Remember, a big part of that is being driven by what we’ve been calling the “Convergence Economy.”
We’ve passed the “tech tipping point” in our lives so that chips, software, mobile, Big Data, sensors, artificial intelligence, virtual reality, wearable technology and much more are all becoming intertwined.
As I like to remind investors, these days every business is a tech business. And consumers have become their very own tech ecosystems.
BP: What’s the risk here… if this doesn’t play out?
MR: Actually, I would prefer to use the term opportunity, because if the market retreats again, we will get another shot to buy great tech leaders at beaten-down prices.
Having said that, the biggest risk I see right now is oil. If we get another big spike down as we saw earlier this year, Wall Street will hit the panic button.
I believe the situation with slower growth in China and Europe’s weaknesses are now priced into the market along with recent earnings.
BP: How, specifically, would you play this? Are there sectors or groups of stocks you like – that you think will benefit? Or is it much broader? Are there areas you’d downright avoid… that might not participate?
MR: It’s funny you ask that. Just today, I read a piece in The Wall Street Journal about the alleged weakness in cybersecurity stocks. The article specifically mentioned that the popular PureFunds ISE Security ETF (NYSE: HACK) has been a big loser.
Except the article failed to mention that since HACK hit bottom Feb. 9, two days before the market overall, it’s up 17.7%.The last three weeks have been a great time to go bottom-fishing pretty much across the board.
In other words, I’m a buyer at these prices on a selective basic. Stock selection will continue to be key because we see plenty of volatility, as we have for the past two years.
BP: What specific stocks do you like… really like… here? Let’s look at one each in the small-, mid- and big-cap arenas?
Among small caps, I like the biotech firm Anika Therapeutics Inc. (Nasdaq: ANIK). The stock just gapped up on heavy momentum, has high profit margins and has the potential to post gains of 25% or more in the next 12 months.
BP: So you continue to like technology for the long term, then?
MR: Yes, it’s hard to imagine a vibrant U.S. economy without a strong tech sector. Silicon Valley continues to be the place with a steady stream of advances that disrupt industries and bring investors outsize gains.
Not only will that not reverse, but it’s only going to become an even bigger driver. Just in the last nine years – a speck in time for the human race – we’ve added smartphones, tablets, connected cars, national Wi-Fi, broadband, mass adoption of video streaming, telemedicine, wearables, virtual assistants and smart homes and smart cities.
How do you go back from that?
BP: Let’s step back here and talk about the structural market… the economy… and the global outlook. Are there any big sinkholes hiding just below the surface, just waiting for someone to make a misstep? What are your biggest worries? As I’ve told my readers at Private Briefing, we are clearly in an “earnings recession,” broadly speaking. That points to opportunism versus indexing – something we’ve both believed in for some time.
MR: The only real sinkhole I see is the powerful U.S. dollar. As we’ve seen this earnings season, it’s cutting into earnings as companies bring dollars back home. And it is also curtailing some sales as foreign goods become cheaper here at home.
BP: Conversely, what are the big growth drivers here? Near term? Long term?
MR: Besides high tech, it’s cars, homes and consumers. Car sales continue to run at all-time highs around 17.5 million units. Home sales still show healthy year-ago increases. And consumer confidence has remained resilient for months now.
BP: And, of course, we have to ask… how is the presidential race affecting all this? What are the undercurrents of a potential Donald Trump presidency?
MR: We’re in uncharted territory here with the Republican establishment trying to shoot down the only candidate who’s actually getting traction with voters.
He’s untested as a national politician but has a great business track record. If he can work with Congress, Trump – or any seasoned business leader – can help grow the economy by setting a pro-business tone, cutting taxes and regulations, and repatriating the trillions of dollars U.S. companies are holding overseas.
I don’t see a Democrat having that same impact because the GOP will likely dominate the House and Senate. But of course, Trump will have to prove he can “play nice” with Capitol Hill.
BP: Any strategies you favor here?
MR: Basically, right now you want to focus on finding quality stocks at discount prices. That way you can add to your long-term gains and boost the value of your portfolio.
BP: Anything you want to add here, Michael?
MR: Just that I see strong technicals for the market lining up with improving fundamentals… and that bodes well for a rebound this year.
BP: Thanks, Michael…
MR: Thank you, Bill.
I’ll see you all again on Tuesday. Have a great weekend.
- Strategic Tech Investor: Why Friday’s “Nightmare” Was Really a Pleasant Dream.
- Strategic Tech Investor: Welcome to the “Convergence Economy.”