This week's market action can be summed up like this: Bad news is good news...don't fight the Fed.
Stocks were on track for their best week in a month despite a string of disappointing news out of the U.S. and Europe, a trend evident again on Friday.
The Dow was up 30 points in recent trading, despite -- or maybe because of -- a disappointing report on first-quarter U.S. GDP, rising bond yields in Italy and an unexpected increase in unemployment in Spain, which also got hit by a sovereign debt downgrade from S&P.
"The market looks at weakness and turmoil and says 'more LTRO or something like it in Europe...the Fed on hold [and] will stretch it out longer,'" explains David Kotok, chairman and CIO of Cumberland Advisors. "Every time there's a shock, it means there will be more global QE. That's what markets celebrate."
'Celebrate' may be a strong word but the market has certainly proven resilient to the latest bad news out of Europe, which today featured Spanish unemployment rising to 24.4% and Italian debt yields moving back toward the key 6% level.
In addition, the advance GDP report showed the U.S. economy grew just 2.2% in the first quarter, down from 3% in the fourth quarter and missing expectations for a reading of 2.5%. Following weaker-than-expected reports on durable goods, jobless claims and regional manufacturing, the GDP report has revived fears of a repeat of 2010 and 2011, when the U.S. economy hit the skids in springtime after a strong start.
"There's an argument in favor of a repeat [of 2010 and 2011] but we don't agree with it," says Kotok.
He sees instead a continuation of slow growth, low inflation and low interest rates, a highly accommodative Fed and strong corporate profits. That environment "can go on for several years" and is potentially very bullish for stocks, says Kotok.
The strategist has a 1550-1600 target for the S&P 500 by the end of 2014 and recommends overweight consumer discretionary and housing while underweighting defensive sectors such as utilities, telecom and consumer staples.
These strategies are detailed in Kotok's new book From Bear to Bull with ETFs, which examines the performance of various sectors vs. the S&P during the market's swoon from April 29, 2011 to Oct. 3, 2011 and the subsequent rebound from Oct. 3, 2011 through Feb. 24, 2012.
"Bear markets set the stage for the ensuing bull market," Kotok says, suggesting the stage is set for yet more gains to come.