For the past month, I’ve been telling people that the market is going much higher and they all look at me like I have 3 heads and I’m speaking a foreign language. I am one of the only people on Wall St calling for a 10-20% rise this year and here are my 4 reasons the Dow will reach 20,000 by year-end:
1) Psychology – No one is expecting a significant move higher and the market tends to fool the majority. I’ll break it down into 3 groups:
Retail Investors – Almost every potential investor I talk to is underinvested, scared, or apathetic about this market. The sharp correction in January rattled many investors and they are afraid to get back in. This is great contrarian indicator because the public is notorious for bad market timing.
Institutional Investors – Many people I know who manage $2B or more in assets have HUGE net-short positions. Think about this for a second. The past few years have been brutal for hedge funds and active portfolio managers. These guys can’t afford another year of sub-par performance or else they will lose their clients. If the market starts to run away from them, they will not only be forced to cover their positions but they also have go long to catch up. In other words, the “chase trade” could help fuel things higher.
Wall St. Strategists – The average 2016 year-end S&P 500 target is 2150. That’s less than 4% away! Many of these analysts say they see “limited upside this year.”
2) Market Resilience – After the huge 5-week gain from 2/16 to 3/18, any negative news could have been an excuse to take profits. The next week, 4 different Fed officials suggested they could raise rates as early as April. In addition, the horrible terrorist attacks took place in Brussels. I was surprised none of these events caused a decline in the market, especially considering it was a light-volume, holiday shortened week where negative news could have easily sparked a selloff.
3) Improving Breadth – In the past 2 months, the number of S&P 500 stocks above their 50-day moving average went from less than 10% to above 90%. This has only happened 3 other times since 1990 and the results after this occurs are very strong. 6 months later, the S&P 500 was up 17% on average and 12 months later, the index was up +24% on average.
4) The Fed – I don’t think the Fed will raise rates this year, as they are most likely frozen until after the election. The dovish statement in their most recent meeting realigns them with other Central Banks, which is favorable for equities. As a side note, before Janet Yellen spoke last Tuesday, there was huge bullish call buying in many Nasdaq 100 stocks. This option activity shows an institutional appetite for risk assets.
Most people who don’t agree with this call will state the following headwinds: China, oil, slowing earnings, and election uncertainty. Keep in mind, the market is a discounting mechanism and has a mind of its own. It tends to trade on what will happen 6-9 months from now. For example, maybe the market has priced in most of the negative news and is looking forward to an uptick in earnings and a new Presidential regime. Of course, why would anyone have a positive outlook about the future when the media has pounded into our heads how miserable everything will be? In other words, learn to think for yourself and pay attention to what the market is ACTUALLY doing, not what you THINK it should do. By the way, if I am wrong about this call and market conditions deteriorate, I’ll simply stop myself out. One of my strengths is that I can change my mind quickly and make decisions without hesitation.
Currently, I am positive for my clients year-to-date and outperforming the general market. Of all the positions we own, there are 4 stocks I feel can appreciate +30-100% in the next 6-12 months. If you are interested in having an account managed, I am opening to new investors for the next week. Please email me for more information: [email protected]