Consensus Expects Year-End Rally Post 10% Market Correction

Last Wednesday, the markets reversed course after experiencing a long-awaited 10% correction from their September highs. The consensus view seems to be that this was a healthy and much-needed correction, and not the beginning of a new bear market, with a rally expected to take place into year-end. Craig Johnson from Piper Jaffray spoke with us on this Saturday's show echoing this view and believes the market will close 10% higher by the end of 2014 around 2100 on the S&P 500.

The positive factors he cites are historical seasonality, oversold conditions, concentrations of foreign capital into U.S. stocks, a delay in Fed rate hikes, lower oil prices, and subsiding fears over Ebola.

Here are a few excerpts from his recent interview on Financial Sense Newshour.

Are you still sticking to your year-end 2100 target on the S&P 500?

“We still are…and I know that is going to set us up for a pretty healthy rally into November and December. Historical seasonality certainly suggests that it is possible to see this sort of rally…and on top of it coming off of midterm elections. If there is any optimism or hope, I certainly see that price target achieved.”

The market just experienced its long-awaited 10% correction. Do you think this is a buying opportunity or the beginning of something more serious?

“As I look at the S&P 500, we’ve had some pretty good support that came into play at about 1850. You had good support after that at about 1740. So what I have historically seen is with this kind of selloff in the market, the internal measures based on the work that we have done here at Piper Jaffrey...when we have seen these kind of conditions present with the breadth of the market as weak as it is, 13, 26 and 56 weeks later the market was higher. Thirteen weeks it was over 75% of the time it was higher in the mid-single digits. As you look out 26 weeks it was about 60% of the time you’re higher, in the low teens. And when you were looking out 52 weeks you had returns close to 20% in the mid-70s in terms of probabilities. So I think…the odds are in our favor that we should be stepping up and be adding exposure to equities. And as difficult as that may seem with all the headline risk that we see out there, we would suggest that now is the time to buy, not sell stocks.”

Energy was very strong the first half of this year and then fell off a cliff. What are your thoughts on this sector?

“We are still neutral on energy at this point in time and have been from the 2nd quarter on; we still think energy does best in secular bear markets. And we have said for quite some time on this show is that the secular bear market is over. We are in a bull market, so I do not believe that energy is going to be a leadership area. To me, that was the last hurrah for energy. I think that we’re going to continue to see the energy sector be a relative laggard compared to new leadership, which is health care, which is going to be tech, and probably we’re going to see a comeback in the consumer cyclical space. Those are the places I’d rather be than energy.”

Are you concerned about the weakness in market breadth?

“Our 26-week new highs indicator and our 40-week technique, which are tools we use to measure breadth of the market, they have been in sell signals since July. Frankly, we’ve been seeing this strength in the dollar really dragging money from overseas markets into the U.S. and pushing up large cap stocks, not to mention that large cap stocks are going to be attractive when we do have a rising dollar because it is going to bring in the foreign capital. But also, concerns about slowing growth are going to lead investors to think about a total return opportunity, and if you can get a nice 3-4% dividend yield, a little bit of appreciation, and also a kicker in terms of the currency, that is going to be pretty attractive for a lot of investors. And, by the way, in terms of breadth, the Russell 2000, while it represents 2000 individual stocks on a market cap weighted basis, it only represents 9% of the overall investable assets in the U.S. So I wouldn’t define it as necessarily material in terms of the overall market itself.”

What’s your outlook on Fed policy? Do you think the Fed will keep rates lower longer than originally thought?

“When you look at Fed funds futures, it doesn’t seem to suggest to me that investors believe that the Fed is going to be raising rates even next year…So it seems like it’s very accommodative and it still seems like future hikes are further out from a street perspective than the Fed has been talking about. So I think you’re going to see the Fed remain very accommodative. They’d like to try and put some of these arrows back into their quiver to a degree in case there is a problem in the future, but it’s going to be very accommodative. The Fed, as I’ve said before on this show, wants to do nothing to slow this bull market down.”

Getting back to your 2100 target on the S&P, what sort of catalysts do you think could drive the market back up to that level? Are you looking at a possible change in the makeup of the Senate, good economic numbers, or positive comments from the Fed for example?

“I think you’ve touched on some of them there. Certainly a change in Washington…I think would be viewed positively. I also think that if we could see some signs out of Europe that they are going to take some additional actions [with] stimulus, I think that would be a positive. And the big unknown question that everybody has been focused on lately is this breakout of Ebola. If that ends up becoming less of an issue than people believe, then I suspect that could certainly quickly put a couple hundred points back into this market.”

It’s clear that Ebola is injecting some uncertainty and fear into the market, with the media playing a role in this as well. Bloomberg Businessweek just ran on their front cover a visually striking image of “EBOLA IS COMING” in blood-smeared red letters. This brings to mind the contrary magazine indicator, doesn’t it?

“It feels like it’s getting overhyped, overblown, and we just need to come back and find the real facts… [P]eople are looking at the rollover you’re seeing with the Russell, Transportation, and the S&P, and they’re saying, ‘Oh my, I got to get out of the way!’ Well, reality is, I’ve never seen a new bear market start at multiples this low, number one. Because they’re trading at multiples basically just above when we broke out of the 2000 and 2007 highs, slightly above that, and on top of that, every major recession in this country post WWII, has basically been started with an oil shock. And we’re not getting an oil shock up. We’re getting an oil shock down. So for all those reasons you stay the course, you view the weakness as a pullback/correction within a secular bull market. And again we think the market still has room to run: 2100 at the end of this year and 2350 at the end of 2015.”

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