Santa Claus Rally: You’re Crazy Not To Invest In This Market

| December 7, 2010 | 0 Comments

On the last day of November I said, “Bullish investor sentiment could send this market into overdrive.”  Since then, the large-cap S&P 500 is up 3.5%.  Even more impressively, mid-cap stocks are up 4.5% and small-cap stocks are up almost 5%!

Clearly the “Santa Claus Rally” has come early this year.

In fact, one underappreciated sector is up over 7% in the last week.  The best part is I think it will continue to lead the markets higher.  I’ll tell you which one it is in a moment…

But first, let’s clear one thing up…

You’re crazy if you’re not invested in stocks right now!

Just look at the facts.

The Fed wants an asset bubble.  Ben Bernanke has said so.  He calls it the “wealth effect”, but if you decode his “Fed speak”, it means an asset bubble.

He’s keeping interest rates near zero “for an extended period” and he’s printing money (he calls it quantitative easing or QE2) to ensure it happens.  And if the dot com and real estate bubbles are any indication, he’ll succeed at creating another asset bubble.

Right now we’re at the beginning of another Fed induced asset bubble.

Sure the markets rallied before the Fed announced plans for QE2.  Then there was a “sell the news” period right after QE2 was announced.

But the full impact of QE2 is still not appreciated!

Don’t forget, the stock market rallied from March of 2009 through April of 2010 without a major correction.  It’s not a coincidence this was when the Fed’s original quantitative easing was happening.

The bottom line is when the Fed is printing money, the price stocks soar! It’s also why mid and small cap stocks are outperforming large cap stocks.

But that’s not all…

Corporate earnings are surging.  Despite the sluggish economy and fears of a peak in profit margins, earnings growth continues to accelerate.  But because many investors thought earnings were peaking last quarter, many stocks are now cheap.

Remember, earnings growth is ultimately the single most important factor for higher stock prices.  So it’s not surprising stocks suffered as investors began to fear a slowdown in earnings.  Now it’s becoming clear earnings growth isn’t going to slow.

It’s creating an amazing buying opportunity in areas of the market hit hardest by fears of a peak in profit margins and earnings.  One industry fits the bill to-a-T… the semiconductor industry.

Just look at this chart of the SPDR S&P Semiconductor ETF (XSD)…

SPDR S&P Semiconductor ETF Chart

You can see it was crushed from April through September.  This was when analysts were speculating the earnings cycle had hit its peak.  Over that time, XSD lost nearly 25% of its value.  But now it’s roaring back.

In fact, XSD has surged to new 52-week highs.  But amazingly, it still looks undervalued…

I think semiconductors and XSD will continue to lead the markets higher throughout the Santa Claus Rally.

With the Fed pumping up an asset bubble and corporate earnings still surging, you’re crazy not to be invested in this market.  The QE2 induced rally is just getting warmed up!

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Category: Stocks

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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