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By Greg Guenthner
February 9, 2011
Dear Penny Sleuther,
On January 5, I detailed three specific reasons for you to be bullish in 2011. I wrote that bears were overlooking important evidence that shows the market would head higher before the end of the year — and that stocks would provide the best investment return in the near-term.
Today, I stand by this prediction. Not because I want stocks to go up (I do), but because the market is dictating that I remain bullish until it says otherwise.
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Of course, the market threw us all a curve ball not long after my column hit your inbox. Stocks faltered, showing signs that a correction would be on the way.
As you can see from the chart of the Russell 2000, the second half of January was a reply of the market action from November. Small-cap stocks slipped below support, only to claw back to new highs, confirming the continuation of the bull market:
Not only does this demonstrate the resilience of the market from a technical standpoint, it also shows that how the market's action plays out on a chart can accurately reflect an improving macroeconomic picture.
Think back to a little more than two years ago. Immediately following the financial crisis in the fall of 2008, the American consumer closed his wallet. He saved cash instead of spending it, especially when it came to big-ticket items. Our consumer-drive economy quickly grinded to a halt.
The reaction to a weakening economy and a flailing stock market was abrupt, but it would not be nearly as easy for the shock to wear off. Even as the markets improved in late 2009, there wasn’t much good news backing up the move on Main Street.
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Fast forward to 2011, and it would appear that much of the pain of the recession is beginning to ease. Slowly but surely, instead of demanding more bang for the buck, we are seeing consumers returning to their spendthrift ways. This is more than a casual observation. The fact is many businesses that were hit the hardest by the consumer pullback are again beginning to flourish.
Jewelry icon Tiffany & Co. (NYSE: TIF) recently raised its full-year outlook thanks to strong holiday sales. Coach Inc. (NYSE: COH), maker of luxury handbags, also has found post-recession success. The company beat holiday sales projections, and even announced a $1.5 billion share buyback. Luxury is back — and it's not just pricey clothes and accessories.
This is the same story the above chart is telling us. In my opinion, one of the best ways to play this bull market would be to translate this recovery story to the small-cap arena by searching for profitable emerging higher end retailers. By doing so, you will find the high-growth names that have the chance to provide you with the best possible returns.
Sincerely,
Greg Guenthner
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