How the stock market got its groove back

By CJ BrottCovestor

For the stock market the month of March certainly came in like a lion. It did not go out like a lamb.

We think the momentum generated by the month’s robust gains will not dissipate quickly. Based on seasonality, the second quarter is historically the second best of the year for market gains.

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Add to that the power of the turnaround from the February lows and, and in our opinion,the market looks poised to move sharply higher.

Historical Trends

As evidence, we note the increasing number of stocks that have moved back above their 50-day moving average price. Those stocks are now back in intermediate term up trends.

Also the record of first quarter reversals of this magnitude is extremely positive.

According to Bespoke Investment Group, during the first quarter, the S&P 500 has historically only declined 10% — and then recovered fully eight times.

Six of those eight times it went on to close higher on the year.  In those instances the average gain was 28%.

In the other two incidents losses were minimal. We think this rally will continue and that 2016 will be another of these up years.

Cautious Investors

In our opinion, this follow through will result from the exceptional momentum shift needed to turn prices higher.

In February we saw extreme liquidation. I believe that liquidation represented an extraordinary level of fear and that fear will not dissipate quickly.

Therefore, while we expect price momentum to continue carrying the market higher, its tone will probably remain cautious.

Slow and Steady

Our case for a stronger market is not based entirely on technical considerations.  The economy continues to plod along.

While economic results are reasonable, they are not strong enough to stimulate rate rises by the US Federal Reserve in our opinion.

However, employment remains steady and consumer confidence is high.

Although this has not yet translated into expanding consumer spending, we remain hopeful it will.

Weaker Dollar

In the meantime we believe new investment will benefit from a continuing decline in the US dollar.

Rather than invest in consumer discretionary companies and wait on consumers, we will put new funds into areas more sensitive to a falling dollar.

Those areas are materials, technology and industrials.  In addition we will be adding to investment in a thoroughly depressed area that may be ready to rebound: biotech.

Because we are currently relatively fully invested, we will be adding to these areas as we liquidate current positions.Photo Credit: john mcsporran via flickr creative commons

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