Here is a recent news letter from my adviser:
SummaryOct 01 11:24 AM
- Market Outlook: October 1, 2016. The technical picture looks bullish.
- The Current Market Concerns: presidential election, situation with Deutsche Bank, and future rate hikes, are overblown.
- The Case for a continued Bull Market.
- The best of the year 2016 is yet to come. Remaining fully invested is likely to pay-off handsomely.
Market UpdateWith the closing bell yesterday, we have officially wrapped up the 3rd quarter and we are now heading into a new earnings season. Finally the month of September, which has historically been the most volatile month of the year, is behind us and we can start looking forward for the 4 th quarter which has historically been the best quarter for the stock markets. On average the Dow index gained in the fourth quarter 2.7% versus a 1.6% average for the other three quarters.
The bulls have regained control of the markets, with the S&P 500 index currently standing above both its 20-day moving average and its 50-day moving average, which looks very bullish:
![[Linked Image]](https://staticseekingalpha.a.ssl.fastly.net/uploads/2016/10/16392_14753338773159_rId10_thumb.jpg)
The long-term chart trend remains strongly to the upside and it looks like the S&P 500 index is ready to challenge again its all-time high of 2193.
Short-term trading range for the S&P 500 IndexTo the upside: As stated above, the next target for the S&P 500 is the 2193 level. If we break above it, we should go much higher.
To the downside: The 2140 level is the first level of support. I view any short-term pullback as a buying opportunity.
The Year 2016 Has Defied All Odds
I have been advocating to be fully invested in the equity markets since the beginning of 2016. As most of you know, I am constantly monitoring and evaluating economic conditions and forces that could affect the markets, in additional to the technical trends for the major equity indexes. Based on my analysis, I have been explaining to HDO members since the beginning of the year why the markets in 2016 are likely to see new highs. Despite all the bearish analysis and reports published on Seeking Alpha and elsewhere about equities since April 2016; they have been all dead wrong. The markets have reached all-time market highs this year, and those who remained fully invested have achieved significant gains. My analysis leads me to believe that the bull market is set to continue and that the full potential of equities in 2016 is yet to be seen. Historically, the month of September has brought a 1% drop in the S&P 500; indeed this year, it defied all odds with the S&P 500 index ending up flat for the month. A combination of factors, including a bullish breakout of the markets, and outperformance of all major indexes leads me to believe that the best is yet to come.
Current Market Concerns Are OverblownCurrently, investors are faced with two main concerns, the U.S. Presidential elections and the troubles at the German Bank Deutsche Bank (NYSE:DB). Let us have a closer look at both concerns:
The situation with Deutsche Bank: Deutsche Bank has been facing a crisis since the announcement of excessive fines by the U.S. Department of Justice. It is worth to note that the Tier 1 Capital of the bank is currently more than double since the 2007 financial crisis and therefore has stronger capital ratios and a more solid base. Furthermore, European money markets liquidity is high, which is quite a different scenario from the one we witnessed during the Lehman melt-down. DB has access to huge amounts of market and central bank liquidity for funding, and has enough capital available to maintain full operations. Finally, Germany is a rich nation which is unlikely to let one of their banks go under. There are already talks that the government may step in to help. Bottom line, I am not really concerned about the situation here.
The situation with the U.S. Presidential elections: This time around the presidential elections have broken with precedent. This has been the most negative race in recent history resulting in many investors sitting on the sidelines until after the election. All the negative focus will soon fade with positive news about economic plans by both parties to increase infrastructure spending which will be great for the U.S. economy. So I would expect that investors will be relieved once a new president is appointed and would result in more cash to flow into equities.
Future Interest Rate HikesThere is a prevalent notion that the Fed is interlinked with the well-being of other central banks' fiscal operations that are fully engaged in elevated levels of quantitative easing. Taking into account a strong dollar, slow economic growth and quantitative easing, this will keep U.S. interest rates at multi-year lows for a long time, even after the expected rate hike by 0.25% in December. In her latest speech, Fed Chair Janet Yellen stated some important notes about the U.S. economy, real estate and the equity markets:
She is pleased with the way the U.S. economy is growing.
She does not think that equity or real estate prices are currently overvalued.
Most importantly, the Fed will remain data dependent before deciding on future rate hikes and that future rate hikes will be slow and gradual, meaning that even if the Fed increases interest rates in December, we may not see another rate hike for a long time.
The Fed has little room for further rate hikes in the future which is great news for the equity markets in general, and for high dividend stocks in particular. Furthermore, we should also note that history has shown that the initial phases of rate increases do not jeopardize the long term market uptrend. With the current slow economic recovery, interest rates will go up much slower than in past cycles.
The Case for a Continued Bull MarketBull markets do not die from old age, but from excess. HDO members should focus less on short-term price movement, and keep a long-term view for their investment positions. In the past few months, the markets have clearly broken out to the upside, something which rarely happens. Based on my experience, this is very bullish. What makes me even more optimistic about the equity markets is that there are too many bears around while large banks and financial institutions are still recommending to under-weight equities. This usually results in retail investors missing out on the current rally and tend to start investing when it is too late. I have explained in details my arguments about why I believe that the markets will soon reach new highs and that any pullback should be viewed as a buying opportunity. I recommend that new HDO members or those who did not get a chance to read my outlook on the markets to refer to the following 2 recent Premium Articles which were exclusively posted to HDO members:
1- Update on September 10: High Dividend Stocks Will Continue To Outperform - Definitely Not The Time To Sell
2- Update on August 29, 2016: Why The Markets Are Likely To Keep Going Higher
I remain optimistic about the outlook of equities in general and high-dividend stocks in particular, and I believe that we will see renewed markets' strength and hopefully new highs in the next few months. While the secular bull market is set to continue, it is best to remain fully invested for the time being and maximize profits from the opportunities offered in the current environment. What I mean by fully invested, is that having a full position in our "Top Buy" list equivalent to 85% to 90% of one's overall portfolio and keep a 10% to 15% cash position. Please keep in mind: As long-term investors, confidence in the stocks/securities we hold and patience are key to our success.
Why keep a 10% to 15% cash position?There are 2 good reasons to keep a 10% to 15% cash position:
While we are currently experiencing a strong bull market, market corrections (or large pullbacks) tend to happen on average once a year. During a market correction, the pullback tends to be steep and swift, meaning that the markets decline quickly but do not last very long (average of 4 months). They tend to be followed by a quick market recovery. On average it takes also 4 months for the markets to go back to the same level before the correction has started. Corrections are healthy and allow the markets to consolidate in order to climb higher. If I see signs of a "market correction", my plan is to propose to members the use of the 10% to 15% cash position to buy some insurance against a market pullback by using inverse Exchange Traded Funds such as the inverse ETF Direxion Daily S&P 500 Bear 3X ETF (NYSEARCA:SPXS). Due to the leveraged nature of SPXS (3 times leveraged), a 10% position in SPXS provides a 30% protection to the overall portfolio, and a 15% position provides a 45% protection to the overall portfolio.
The second reason: For HDO members who do not wish to invest in leveraged ETFs, they can use the funds to average down their positions in case of a temporary pullback.
The next Key Event to watch out for next Friday is the Unemployment Rate Report. This is the most important report that will be released by the government next week. The Labor Department will announce the official unemployment rate. We will see what the numbers mean for business nationwide.
![[Linked Image]](http://static.cdn-seekingalpha.com/images/charts/desk_hp_chart.png)
