Are you a fan of stocks right now? You should be.
From the moment the calendar flipped over to 2013, "buy signals" have been ringing on Wall Street. And right now a convergence of factors points to this year besting even the strong stock performance we just closed in 2012. Today, I want to share five factors that prove why it makes sense to be bullish this year.
Let's get right down to it...
1. Technical Strength
If you've been reading Trend Playbook for a while, you know that the market's technicals look strong right now. In spite of a market correction in the fourth quarter, most indexes are still in a major primary uptrend. Take a look at this chart of the S&P 500 for the last year and a half:
It doesn't take more than a quick glance to see that the S&P has been making higher lows ever since October 2011 - and that there's a trendline support level the big index has been obedient to the whole time. That's bullish.
Zooming out even more presents a very interesting picture of the S&P too:
The chart above shows the weekly price action for the S&P 500. Most significantly, you can see that the same trendline that connects those lows from October also connects the S&P's bottom back in March 2009. If that's not confirmation that the S&P 500 is in a primary uptrend right now, I don't know what is.
Correlations are very high for the S&P 500 right now, with around 67% of the big index's moves being mirrored in individual stocks. That fact means an uptrend in the S&P equals higher prices for just about every single name out there. And now with the index sitting just shy of new 52-week highs, a quick breakout could be in store for stocks.
2. Contrarian Sentiment at Extremes
Investors haven't been very fond of stocks lately. In fact, they've hated them.
Even though the market has returned some impressive performance over the past few years, most investors have missed it. According to a survey from Franklin Templeton, 66% of investors thought that the S&P 500 declined in 2009; in reality, the index climbed 26.5% on the year. Similarly, 48% of people thought that the S&P dropped in 2010, when it really increased by 15.1%.
How many of your friends and neighbors painted 2012's 13% rally as a tepid year for stocks? The fact is that a skewed view of reality is painting investors' mistrust of the market. That's not likely to last once a conspicuous stock rally starts taking hold.
3. A Mountain of Treasury Cash
If investors have hated stocks, they've been in love with Treasuries. Even though U.S. government debt has paid out interest rates near zero since the Great Recession began, people are more scared of risk than they are eager to earn good returns. So Treasuries have acted like a magnet for cash for years now.
The problem with that is inflation is dramatically higher than returns on Treasuries right now. In other words, Treasury investors are seeing the real value of their investments decrease pretty quickly over time. While that's fine in the short term for investors who are terrified of risk, it's toxic over the longer term. Eventually, Treasury investors aren't going to be able to take the pain of negative real returns anymore, and when that happens, there's a mountain of cash in Treasuries that's going to be looking to move into stocks.
We're already starting to see a trickle of Treasury cash moving to equities this month. When the trickle turns to a flow, stocks will rally hard.
4. The Cycles Line Up
Don't let the words "new normal" fool you - even though the talking heads on TV like to talk about current market conditions as if we've never seen them before, the fact is the scenarios we're facing now are nothing new. In fact, we've seen them like clockwork every 40 years or so.
The last time we saw a similar cycle was back in the late 1970s, when BusinessWeek printed its infamous "Death of Equities" cover. Before that were the late 1930s, when investors were still reeling from mistrust of the market after the Great Depression. In both cases, the years that followed came with some of the biggest stock gains in history. There are many parallels between the conditions we saw the last two times this cycle occurred and what we're seeing now - while that's a longer-term conclusion, it at least points to a strong performance in 2013.
5. Fundamentals Look Cheap
Believe it or not, fundamentals look cheap too. As I write, corporations are sitting on bigger profits and bigger piles of cash in their coffers than at any other time in history. Since the Great Recession, stock prices have rebounded considerably, but fundamental performance has rebounded even better.
Today, the S&P 500 pays out a bigger dividend yield than it has for any sustained period since 1990. And the valuation metrics in the market today line up perfectly with the types of multiples we saw back in the late 1930s and 1970s. That sets the stage for a fundamentally driven rally in the years ahead.
Look, I realize that it's hard to look past the anxiety in the markets right now. But it's always tough to look past the scariness at an inflection point in the market. It's only the first week of 2013, but we're already seeing some impressive evidence toward this being a stellar year. Obviously, market forecasts are always subject to change - and the technicals are going to be the first clue that something's amiss. For now, though, the reasons to buy stocks in 2013 look strong.
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Jonas Elmerraji, CMT, is the co-editor of STORM Signals and Penny Stock Fortunes, and a contributor to Agora Financial's Trend Playbook. Jonas got his start on the fundamental side of the market, pouring over financial statements and valuations to find sound investments. Today, he specializes in blending fundamental and technical analysis. Jonas is a senior contributor to TheStreet.com and has been featured as an investment expert in Forbes, Investor's Business Daily, and CNBC.com among others.
Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.
This article was originally published at PennySleuth.com and is reprinted on Investors Alley with permission.