Why Stocks Will End the Year With a Bang

 | Oct 03, 2012 | 12:00 PM EDT
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Apple (AAPL) paid a visit to its 50-day moving average Tuesday, and just when it looked like the bottom would fall out, buyers came into the market and lifted it off its lows. The day's action showed that bulls remain in control for now.

The bear argument goes something like this: Weakness in the transports can't be a good thing for the market, third-quarter earnings season will be a disappointment, and it's only a matter of time before Apple takes out its 50-day simple moving average with conviction.

Of course, these are all legitimate concerns, but plenty of other good things are happening in the market right now to warrant a glass-half-full perspective. Below are five reasons to expect a solid end of the year for the stock market.

1. Market leaders look good: The bullish charts on my growth screens outnumber bearish ones by a wide margin. Just about every name I follow -- including all 12 names in my Ultimate Growth Stocks model portfolio -- continue to hold above support and aren't showing much in the way of sell signals. There are plenty of broken stock charts out there, but not when it comes to the real market leaders. If the market were really in trouble, leading growth stocks would be flashing sell signals. They're not.

2. Weak U.S. dollar: Not everyone likes a weak greenback, but the stock market sure does. The good news for bulls is that it doesn't look like the U.S. dollar is ready to start a meaningful uptrend anytime soon. Federal Reserve policy has a lot to do with it, and the Fed's position isn't likely to change anytime soon. The dollar remains in a technical downtrend, stuck underneath its 200-day moving average at 80.71 and its 50-day moving average at 81.36. These levels could be resistance for now. Meanwhile, gold tends to rise when the dollar is weak, and recent price and volume trends in the SPDR Gold Trust (GLD) tell me that a breakout over its Feb. 29 intraday high of $174 isn't out of the question. The fund remains under accumulation and continues to show relative price strength.

3. Weak bond market: The chart of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) continues to look weak. Its 50-day moving turned out to be a resistance level in early September, and it is facing resistance at the line again. Since interest rates are as low as they are, the case for owning bonds isn't a strong one at the moment. As a result, money could continue to flow into stocks.

4. Limited distribution in major averages: Distribution is synonymous with institutional selling. When big investors start liquidating positions, it's a good time for individual investors to start raising cash. I'm not seeing much of it at this point. Headed into Wednesday, the S&P 500 showed four higher-volume declines since Sept. 20. Repeated higher-volume declines can stop a market rally in tracks. It can also be a precursor to more selling down the line. But two recent higher-volume declines didn't feel like institutional selling at all. On Sept. 20, the S&P fell on higher volume, but it finished near its session high after early weakness and lost less than 1 point. The very next day, the S&P reversed after early strength but once again lost less than 1 point. Volume was skewed a bit by options expiration. Meanwhile, institutional selling in the Nasdaq Composite has been much less prominent. The tech index shows just two higher-volume declines in recent weeks.

3. Bullish charts in the financial sector: Inside the Dow, financial stocks such as Citigroup (C) and JPMorgan Chase (JPM) continue to set up for possible upside breakouts. Citigroup is sitting just underneath a swing point (buying area) of $35.25, its Sept. 14 intraday high. JPMorgan Chase is flirting with possible breakout over $42.09. On Tuesday, Credit Suisse raised its rating on the sector to outperform, saying that loan growth in the third quarter could surprise to the upside.

Even though there's reason to be optimistic about a solid finish to the year, it's not out of the question that we could see major averages could pay a visit to their respective 50-day simple moving averages, which are likely support levels. The Nasdaq closed Tuesday at 3120, about 60 points above its 50-day line, and the S&P 500 finished at 1,445, about 30 points above its 50-day line.

Columnist Conversations

Now that AAPL has violated the shorter term support, these are the two areas I have to consider for new buy en...
The symmetry is holding up in MCD.  Target 1 is 163.34 if we continue to hold above here!  ...
As far as TSLA is concerned, I still have a higher target above the market at the 409 area.  I stated in ...
The TLT setup discussed in my last commentary is a bust. Key support was violated and it violated the recent l...



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