The first two weeks of October has spurred a fantastic stock market rally.  But the question is “Will it continue?”  As anyone knows that has followed me this year, my end of year target on the S&P 500 has maintained at 1350.  Many people commented that was crazy when we were broke below 1100, but now after the last two week stock market rally that target seems much more achievable.  Once again I continue to maintain that target, so yes, I feel we still have more legs in the stock market rally, but I also think we have one more down leg before ending the year strong.

I say this because the market has been trading on rumors as of late about Europe.  The hopes of resolution out of Europe is what has allowed this stock market rally to occur in the last two weeks.  Sure earnings have been tremendous so far, but so were many of them the last two earning seasons.  But the difference now is that their is a light at the end of the tunnel for Europe which allowed traders to make more decisions based off of fundamentals.  This is the key, because as I have analyzed many sectors and companies over the summer, there are so many bargains sitting out there.  Unfortunately, I feel that tunnel with the light at the end is longer than people will hope for, and because of this it will allow for news to come out at some point taking European markets down which the US markets will follow.

Trading strategy for stock market rally

Until we get that finalized resolution out of European leaders, I refuse to recommend going fully long.  Now I am very long, but still have cash sitting around as well as I added to my VXX protection.   In order to really take the stock market rally to my 1350 level by end of the year, we will need financials to help us out.  They have not done that in a very long time, and Le TARP being announced in Europe will definitely help our US based banks like Bank of America, Citigroup, Goldman Sachs, and my favorite JP Morgan that I feel can bounce back to mid 40′s very quickly after European fires are put out.  This should really help the financial ETF’s as well like the XLF.

Stock market rally portfolio 

Now if we were going to make up a portfolio for the next couple months I would keep the same strategy as always with some different allocations adding a bit more beta.  I have no intentions of keeping my high yielding core.  I may never sell Altria, AT&T or Enterprise Product Partners while adding and selling around that core position.  After Bristol Myers run up, its yield actually has dropped to 4% so I have recently sold out of it and moved to some more aggressive high yielding names.  In the copper space, I own Southern Peru Copper; and have opened positions in some REITs (RWT and HR). 

Now on top of this high yielding core position now with more beta (risk), the remaining pieces of my portfolio positioned for the end of the year is overweight in technology and industrials.  Once again, I have not made my favorite names a secret.  I have been saying all summer how undervalued Apple and Google both were and we know how well they have done.  Critics said the new iPhone release was lackluster but they still sold a record amount of units on the first day.  Analysts were voicing that Google was going to have margin compression due to its costs, but they came much close to my earnings per share than analysts taking the stock 100 points in a few weeks.  F5 Networks has jumped back to $90 a share quickly and now is not as cheap as it was.  As much as I love this name, there are cheaper stocks right now in tech.  Akamai is up over 20% but still has much more upside in my opinion.  CREE is sitting at its 52 week high and still has room to run as well. 

In the industrials, I love copper as having the biggest bounce and should lead the stock market rally, but did not want to have 2 copper names with the large position of SCCO I have.  But if you do not care about yield, Freeport is a brilliant choice to pick up as it also has a growing gold production.  In coal, I love Walter Energy, I have been trading around a position all summer and it has been extremely volatile being over $120 most of the time and then dropping to $60!  Now after the recent two week stock market rally it trades at around $80.  Agriculture names have a very big upside with names like Monsanto and Potash standing out.  Caterpillar and Cummins have both reported great earnings over the summer and had very upbeat conference calls.  I also feel everyone should have at least 20% of their overall portfolio in energy.  I own a pipeline company but also own Chesapeake Energy and Core Labs. 

I feel that once we have the closure in Europe the stock market rally will be a lot like the run up in 2009 but for not near as long.  All names will go up for a bit and then the averages will continue higher but in a more of a stock picker market.  How ever you position your portfolio for the upcoming stock market rally, remember to stay disciplined and not be scared to trade.  We could have another leg lower before the continuation of the stock market rally, so do not go all in!

Have a great weekend,

Vinny

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