The Case for a Short-Term Stock Market Rally, And How to Play It

By: Money_Morning

David Zeiler writes: The short-term market rally we've seen over the past week represents fresh opportunities to profit, but be forewarned - it won't last.

The Dow Jones Industrial Average on Monday rallied 272 points, or 2.5%, and followed with another 148-point, or 1.34%, gain on Tuesday. That's after last week's 738-point, or 6.4%, tumble. TheStandard & Poor's 500 Indexis up 3.4% this week after last week's 6.5% fall.

Money Morning Chief Investment Strategist Keith Fitz-Gerald knows why the short-term rally is happening - and how investors can best to take advantage of it.

"I can make a case for a short-term rally that may build through the end of the week or even longer, now that the markets have gotten their ya-ya's out via the vicious selling of recent days," Fitz-Gerald said.

According to Fitz-Gerald, there are three things that could fuel a brief stock market rally:

•We're coming up on the end of the quarter. Given the massive over-performance of bonds over the past 12 to 24 months, the bulk of the institutions are likely to rebalance their portfolios by buying equities -- probably dividends and energy.
•The end of the year is in sight, too. That speaks to a practice called "window dressing," which are changes to a portfolio that institutional managers make to spruce up their quarterly client statements, while bolstering their bonuses if possible.
•The markets are very oversold, technically speaking, and that lights a fire under Wall Street's feet with regard to the timing. The markets historically want to reward underperformers. That's why the fear of missing further gains could pull more money into the game short-term.

So what can an investor do with this short-term market rally? Fitz-Gerald has several suggestions:

Exploit the Weak
First, Fitz-Gerald said investors should take a look at the weakest sectors.

"Many in the energy, financials, and now metals-mining sector are off by 10% or more -- and therefore especially appealing when it comes to rebalancing," he said.

Fitz-Gerald also recommends "glocal" stocks, large multinationals which are expanding into emerging economies.Specifically he likes McDonald's Corp. (NYSE: MCD) and General Electric Co. (NYSE: GE).

Because gold, silver and oil fell along with the markets last week, they present an attractive alternative right now, Fitz-Gerald said. He believes gold will hit $2,400 an ounce and silver $60 an ounce in the next 24 months.

Fitz-Gerald advises against bonds, however.

"The pressure for higher interest rates is mounting. I don't think the Fed will be able to hang on much longer by artificially sustaining the low rates it's got on tap right now."

Buckle Up

Looking toward the medium and long-term, Fitz-Gerald says investors need to prepare for more volatility like the recent selloff and short-term market rally of the past two weeks.

"Despite the fact that the VIX (Chicago Board Options Exchange Market Volatility Index) has come down substantially from the reading of 48 we saw in August, it's still pricing in 3% to 4% moves per day through November," Fitz-Gerald said. "That's worth a gut-wrenching 340 to 454 Dow points in both directions."

He said that events in regard to the Greek debt crisis could cause wild market swings.

"Very simply: If Greece gets its act together, I can easily envision another 1,000-point run higher," Fitz-Gerald said. "If it doesn't, we're staring at a 1,000-point abyss."

But even market volatility can work in your favor if you keep your eye out for bargains.

"It means that many great companies are going to be on sale," Fitz-Gerald said. "As uncomfortable as it seems, remember: Fear creates temporary mispricing that can work in our favor -- even if we haven't hit a bottom, let alone the bottom."

That brings us to Fitz-Gerald's final caveat: In the long term, this market is going to be a bear. He has been predicting for weeks that the markets eventually will re-test their March 2009 lows.

"Fundamentally, there's not much that says this stock market rally can keep going over the longer term," Fitz-Gerald said. "Our debt is once again a problem, our jobs situation stinks, our government is dysfunctional, and then, of course, there's Europe."

No matter what happens, investors must avoid the temptation to sit on the sidelines.

"People who panic usually don't make a dime - but those who take advantage of those who panic can make bank!" Fitz-Gerald said.

To ensure that you get all of Fitz-Gerald's recommendations and specific stock picks, be sure you're signed up for the Money Map Report. If you're not already a subscriber you can join by clicking here.

Source : http://moneymorning.com/2011/09/29/the-case-for-a-short-term-market-rally-and-how-to-play-it/

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