Why Stock Sizzle Won't Fizzle

The risks on Wall Street are far from over and bulls can also be gored. You might be one of them.
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"They ought to move the New York Stock Exchange from Wall Street to Cape Canaveral," one Los Angeles money manager quipped the other day. Why so? "Because this market looks like it's moon-bound," he says.

A flamboyant comment, of course, but not to this manager, who says the only question now, given the market's sharply rising momentum, is how high is up. His view: The Dow (currently at 10,850), could reach 12,000 before the end of June as more and more investors shed their timidity and come out of the foxhole.

Aa former bear who has swung into the bullish camp,he thinks positive job hiring numbers for a couple of months -- which he expects soon -- could spur a stock buying frenzy. And that, he believes, could lead to an all-time high in the index (above its October 2007 peak of 14,164) before year end.

For some thoughts on this "moon-bound" view, I rang up one of the investment community's more incisive and analytical minds, Bill Rhodes, a former market strategist at Merrill Lynch. Methodical, scientific and exacting and presently skipper of Boston-based Rhodes Analytics, Rhodes is paid big bucks for doling out investment advice to major institutional investors, such as pension funds, mutual funds and hedge funds.

Rhodes also boasts a snazzy record of catching up and down market movements. One of his more impressive calls came on March 22, 2009, when the S&P 500 was trading at 768. At the time, he told clients that an unusual flood of liquidity from the Fed and the Treasury signaled the likelihood of much higher equity prices. With the index more than 50% higher now at 1,166, it turned out to a super money-making call for any clients wise enough to heed his words.

A former classical pianist, Rhodes tells me as he looks at his indicators and models -- which show the market to be awesome -- "it's hard to say this market is not going to go higher or quarrel with that moon-bound comment." Spelling out why he's so gung-ho, Rhodes points to the following:

--We're in the early phase of an economic expansion.

--Corporate profits are up 30% on a year-over-year basis.

--The trend in retail sales is pretty good.

--Initial jobless claims have retreated 30% year-over-year.

--Year-over-year, the housing market is not as bad as it had been, with new home sales down 13%, versus a much heftier 39% year-over-year decline as of last March, and existing home sales are up about 43%.

--Domestic non-financial and non-federal debt, year-over-year, is shrinking for the first time in 60 years, versus government debt, which is going through the roof.

In addition, Rhodes notes the breadth of the market (advancing stocks, versus declining stocks) is tremendous, volatility is going down, spreads on stock prices between bids and asked are narrowing, and volume is picking up.

"Based on what's going on now, I think you can go into the market, buy and realize positive returns," he says.

Rhodes wouldn't discuss individual stocks, but he did identify the sectors that show up strongest in his work. They are consumer discretionary, financials and export-oriented industrials, all of which are beneficiaries of an economy in the early stages of expansion.

On a cautionary note, Rhodes expresses concern that the money stuffed into the financial system by central banks and finance ministers to keep it from going down is now being withdrawn. In the U.S., for example, he takes note of the shutting down of such government-support programs as commercial paper facilities and temporary liquidity swap arrangements. Since liquidity is being drained globally, he says, and the thing to do is to keep an eye on it because if something goes wrong, that's where its going to happen. Another of his concerns is that debt is growing /by leaps and bounds worldwide and Moody's, he points out, is even saying it may have to downgrade U.K. and U.S. debt.

There's an old Marine saying, No guts, no glory. Rhodes never said it in so many words, but his investment message is clear: Now is the time to realize more stock market glory if you've got the guts to play.

He may be right, but it's noteworthy to me that in the past two trading sessions (Thursday and Friday) the market racked up some impressive gains in early trading, only to see them substantially pared later in the day amid waves of brisk profit-taking. What does it mean? That the risks are far from over and bulls can also be gored. You may be one of them.

What do you think? E-mail me at Dandordan@aol.com.

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