WATCH: The 4 Stage Stock Market Cycle


3 Great Reasons to Double Down On Stocks

By Costas Bocelli August 9, 2018 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

This is supposed to be a bad year for stocks.


If you’ve been sucked into the financial media, you'd think there were plenty of reasons to stay away from stocks.

Don't fall into that trap!

True, the second year of the Presidential Election Year Cycle, aka, “the Midterm Year”, is historically a weak one for the major stock market averages.

But Donald Trump is no ordinary president…

And to be sure, this is no ordinary market.

After the stock market suffered one of the fastest corrections in more than 80 years earlier this year, the major averages are once again nearing all-time record highs.

The S&P 500 is now within striking distance of eclipsing the prior all-time highs achieved in early-January.

(Click any image to enlarge)


If you’ve been paying attention, we’ve been pounding the table on three major themes that should keep the bulls in control of the stock market.

Earnings, Earnings and More Earnings…

U.S. Corporations are crushing it!

A couple of weeks ago, we highlighted that the busiest week of second quarter earnings season would likely show record earnings growth.

And boy oh boy... did they deliver the goods.

The “grand finale” was a massive earnings beat from Apple (AAPL).

After the company reported blowout earnings, the world’s most valuable publicly traded company became even more valuable.  In fact, it became the first U.S. Company to surpass a $1 trillion market valuation.

With earnings season winding down, the earnings growth rate for the S&P 500 is 24% from the same quarter a year ago.  That growth rate nearly matches the first quarter and is the second-best quarterly growth rate in almost eight years.

And unless things change drastically, there shouldn’t be a letdown anytime soon.

According to FactSet, earnings growth in the current quarter (Q3) and the fourth quarter are projected to increase 20.7% and 17.8% respectively.

So as long as earnings continue to trend in this direction, Mr. Market should maintain a happy mood.

Buy Backs, Buybacks, and More Buybacks…

U.S. Corporations are flush with cash and they’re working overtime to put that cash to work.

One of the most effective ways to boost earnings per share, and in turn, share price, is to reduce the number of shares.

And thanks to strong profit growth, an improving economy, and the newly enacted corporate tax bill (which includes the foreign repatriation tax holiday) companies have authorized a record level of share buybacks.

According to a client note released by a Goldman Sachs strategist, U.S. companies are expected to authorize more than $1 trillion in share buybacks for 2018.

The research note stated there’s typically an 85% follow-through rate on announced purchases.  That means plenty of pent-up demand for shares throughout the remainder of the year -- especially if stocks come under any near-term weakness.

In other words, there may very well be a “corporate Put" underpinning any investors who are bullish for stocks. 

The Trend is Your Friend

At True Market Insiders, we believe that price is the ultimate truth teller.   Nothing else is so reliable when it comes to what’s really going on in the stock market.

And right now, trends in price action are resoundingly positive.

Whether we look to the external markets (the major stock market averages like the S&P) or we look to the internal markets (market breadth) we’re seeing plenty of bullish strength.

And so long as both confirm one another, the U.S. stock market should be viewed as a highly favored asset class.

In fact, U.S. Equities have been the strongest broad asset class through the lens of relative strength analysis for two-years.

Within the domestic stock market, the Technology and Financial Sectors have been the top two rated broad sectors with respect to relative strength since early-2017.  These are the segments of the market that have generated superior returns for investors.

From a technical perspective, July turned out to be very a positive month for the major stock market averages.

While the S&P 500 managed to close with a weekly gain during the entire month of July, it was the relative outperformance in the Dow Jones Industrial Average and its sister index, the economically sensitive Dow Jones Transportation Average that really caught our attention.

Comp Indu Trans

Ever since both indices hit a cyclical low in late June, we’ve seen a strong rebound and a re-emergence of leadership from the Dow indices.

While both indices remain below the previous all-time highs in late-January, what’s most notable is that both are demonstrating relative strength in tandem over the past several weeks.

According to Dow Theory, if both indices are moving higher, it’s a confirmation of strength.  And if both happen to hit new all-time highs, in tandem, it will generate a classic long-term “buy signal”.

Both indices are just a few percentage points of their previous all-time highs.

So we say: Ignore the noise!

Instead, listen to what the market is telling you.

And from our perch, it's roaring out that the bulls remain firmly in control.

Until next week!