Stock Market Strategy: A Follow Up – Transition From Short to Long

On Friday of last week I outlined a case for impending equity market strength. Please refer to this post titled, Stock Market Strategy: Reduce Shorts Expect Equity Market Rally , for complete details. Today, I would like to review recent news events and the market’s subsequent reaction to see if our bullish call has horns.

To begin, I’m going to share a family secret with you. Gary Rosenthal considers this axiom one of the most important precepts to investing and has drilled the concept into my thinking over the years.

Gary, (father, mentor, principal) has developed a remarkable reputation during his 44 year professional involvement with equity investing. He began his career as an equity analyst writing 50 plus page in-depth research reports. To my Dad, breaking down balance sheets, income/cash flow statements and dissecting management teams is a joy not a job.  Because of this devotion to the uncovering of truth Gary has succeeded at every level of the investment community from advising institutions to counseling private investors to the building of family wealth.  

Rosenthal Investing Axiom: One must constantly test one’s investment thesis as complacency can quickly turn into calamity. We must with vigilance watch for signposts along the investing highway that either confirm or deny our vision.

So, without further ado a test of our nascent bullish vision shall commence:

The obvious tends to offer the best starting point. Since our call on Friday the NYSE Comp.(Our favorite index) has rallied 3.3% and is up 7.4% since the low on 6/8. Moreover, during the last three trading days a couple of our forecasts have become fact.

1) We contended that the market would respond well to positive developments regarding imminent financial regulation (FINREG.). The story below illustrates the onset of positive news flow gathering about FINREG. and in this case the apparent lack of imminence….

Lincoln Considers Compromise on Swaps-Desk Provision

June 14 (Bloomberg) — Senator Blanche Lincoln may modify her proposed rules on derivatives by giving commercial banks two years to push out their swaps trading desks into subsidiaries. The compromise proposal also would allow the Federal Reserve to provide system-wide emergency assistance to swaps dealers, according to a draft obtained by Bloomberg News and confirmed by Lincoln’s office today.

Read More…

2) We believe negative economic news will no longer drive the equity markets to new lows. On the contrary, we believe negative news is the new positive. Every disappointing economic development now drives politicians closer to another stimulus package as the pressure of the midterm election process grows near.  Threat of a double dip recession will give impetus for the Fed to resume quantitative easing the main fuel for equity market fire. Case in point, the Payroll data released on June 4th was terrible and yet markets held ground and set up a double bottom…

Payrolls in U.S. Increase 431,000 in May, Jobless Rate at 9.7%               

June 4 (Bloomberg) — Employers in the U.S. hired fewer workers in May than forecast, showing a lack of confidence in the recovery that may lead to slower economic growth.

Read More…

…The following two stories only strengthen our resolve as equity markets are higher by 2% today in the face of economic hardship…

Empire Employment – Strike 3? PMI’s Suggest NFP Growth Rolling

Last weeks weak retail sales already suggested that next months NFP may underwhelm with a headline of sub 300k including the census jobs next month. That would naturally suggest poor private sector employment and with the Empire Employment data out this morning that indeed appears to be increasingly the risk. Indeed, that relationship supports the roll we have already seen in the Chicago and Philly data…..Strike 3?

Read More…

Builder Sentiment Tumbles As Tax Credit Expires

The NAHB Home Builder Survey reported a massive 5 point drop, reaching 17, on expectations of 21. The reason for the plunge – concerns about the end of the tax credit. Not even Goldman could spin this news favorably: “Housing market index 17 in June vs. median forecast 21. The National Association of Home Builders reported a 5-point drop in its housing market index for June, pushing it back below the 20 level that had been the low prior to the latest housing market recession.

Read More…

We will continue our vigilance and report our findings on this blog. So far the signposts all point to a confirmation of our beliefs. Further equity market upside would not be surprising.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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