Breakout

History & Technicals Pave the Way for Stocks to Go Higher: Stovall

Breakout

Mark Twain famously wrote that "history doesn't repeat itself, but it does rhyme." And right now, a glance in the rear-view mirror has given strategists like Sam Stovall, Chief Investment Strategist at S&P Capital IQ, reason to buy.

"History as well as technicals were telling us that stocks were likely to work their way higher towards the end of the year," Stovall says in the attached video. "We weren't so sure regarding the economic and fundamental data, but now maybe the overall economic picture is a little bit better too," he adds in light of today's better than expected jobs report.

Perhaps fittingly, Stovall and his firm raised their price target before the data even came out, the mid-week tweak raising their 12-month target for the S&P 500 to 1500 from 1450 previously.

"Our feeling was, a year from now, the trajectory of both earnings and economic growth would be up, not down as it is today, and as a result we might see an increase in the P/E multiples," Stovall says, referring to the notion that investors will be willing to pay more for a dollar of earnings growth than they currently do.

His bullish bias is also backed by technical analysis, and specifically the recent uptrend in stocks since June which has lead to higher-highs and higher-lows; which essentially means the sell-offs aren't quite as sharp as the rallies. As a result, the S&P 500 will likely post it's 4th consecutive weekly gain today.

Prior to the release of the payroll report this morning, Stovall and I were struggling to come up with a scenario that would disappoint investors, the thought being that a very weak result (i.e. significantly less than the consensus estimate of 100,000) would only increase the odds of another round of stimulus from the Fed, perhaps even as soon as the end of the month at their Jackson Hole meeting.

With a QE3 action probably pushed backed a bit, investors will be looking to the September FOMC meeting instead, with many pundits arguing that doing anything later than that risks charges of politicization given the proximity of elections in November.

"I disagree that (the Fed) cannot do anything in October," Stovall argues, pointing out that in 9 presidential election years since 1976, the Fed has done something in August, September and October 7 times. "So the Fed has certainly acted just before presidential elections."

Whether the Fed offers more stimulus or not, Stovall says "the biggest worry on Chairman Bernanke's plate right now is the fiscal cliff." The looming threat of tax increases and automatic budget cuts that are slated to take effect next year could douse any spark of economic growth.

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