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3 Reasons to Believe in Bull Market; Consider US ETFs
Aspire | 21 October 2015
By: Lim Si Jie
Articles (169) Profile

At a time when everyone was uncertain and inclined to believe that the U.S. market is on the verge of a bear market, Jim Cramer believes that it is time to rethink that viewpoint. This is because that is exactly what he is doing. Jim Cramer cites three reasons for his newfound belief in the market: Fed’s dovishness, oil’s rally and improvements in China.

1. The Fed’s Dovishness

A few weeks ago, the Fed issued a statement saying that it was on track to tighten, unless data points to a different picture. Then came September’s weak employment number which seems to suggest that the U.S. economy is not as strong as it seems to be. Immediately, a possible rate hike moved out of the spotlight. The continued dovish tone in Fed’s latest FOMC meeting minutes signals 2016 to be the earliest date for an interest rate hike, if any. From a positive viewpoint, the Fed’s dovish stance encourages economic growth.

2. Oil Rally

The Baker Hughes rig count had dropped a staggering 26 rigs in the United States. It was the biggest decline since April and the fifth consecutive weekly decline. The cut, which will directly impact the amount of oil produced in the U.S., was also a sign that the weak hands are being flushed out.

According to this chart, the U.S. oil rig count has been falling for consecutive months since rig count topped a year ago. Cramer believes that the market is set up for a dramatic decline in the amount of oil produced next year, which will send prices up.

3. Change in Chinese Mortgage Rates

Cramer believes that the sudden change in Chinese mortgage rates, which has been an impediment to growth in China, will revitalise the Chinese economy. According to David Darst, former chief investment strategist at Morgan Stanley Wealth Management, investors been too hung up on China’s stock market. But many might not know that “Their real estate market is to them what our stock market is to us, and their real estate market they’ve managed to stabilize,” said Darst. The move to adjust Chinese mortgage rates is a good thing for the Chinese consumer as they attempt to bring stability to the economy.

Cramer added that since copper is an important element to new homebuilding, the change in Chinese mortgage rates might even provide fundamental support to copper prices.

Oppenheimer Sentiment Index: Market Was Oversold

Source: CNBC

Cramer’s sudden change in view on the market is echoed by Ari Wald, head of technical analysis at Oppenheimer.

Citing the Oppenheimer’s composite market sentiment measures, which use information from Investors Intelligence, Consensus Inc., Market Vane and the American Association of Individual Investors, 79 percent of the market was bullish in March, but has fallen to 31 percent, one of the lowest readings in several years.

However, Wald believes that the market overshot to the downside here in the sell-off. With the market stabilizing and the low from August tested, Wald sees a lot of contrarian firepower and feels that the market is in a position where “we snap back the other way”.

Corporate Profits Key in Earnings Season

To be on the safe side, David Durst also urges investors to watch out for two other things right now: credit and, most importantly, corporate profits.

When it comes to credit, Darst noted that the spreads are widening in junk bond yields, which he deems as a usual precursor of slowdown in the economy.

In terms of corporate profits, the S&P 500 is trading at 16.5 times forward earnings, slightly above the 15-year average of 16 times. “But how do you justify 16.5 times next year’s multiple” if earnings and revenue both declined year on year?”, questions David Darst. Market consensus is currently forecasting a decline in third-quarter S&P 500 earnings. If that projection bears out, it would be the first quarter of an overall earnings decline since the third quarter of 2009.

Investors Takeaway: Buy US Indices If PE Falls


If earnings multiple and forward earnings multiple falls below 15-year average on the back of higher corporate profits, investors can consider investing in US market ETFs such as SPDR S&P 500 and ISH CORE S&P 500. However, the caveat is that Fed does not surprise the market with a sudden rate hike.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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