Great News: The Selling is Over

Spencer is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After a bitter bout of selling for superficial reasons, we are expecting to see the market make a full recovery over the next three to four months.  From the early October 2012 high, the Dow Jones Industrial Average (NYSEMKT: DIA) slipped about 8.2%.  Many put the blame on the Presidential election for this slide, and many more predicted the market would completely and utterly collapse after a President Obama victory.  The truth is that the Dow slipped 5.3% after Nov. 6, and call me old fashioned, but I for one do not consider this a market collapse.  The important note to make here is that the Dow had a very nice 13% rally from June through October, and the same fundamentals are intact from that rally.  Therefore, many short term traders and institutional investors simply used the election results as a reason to collect profits.

The fundamentals are still intact

Despite the selling, the fundamentals of the economy and financial markets have not changed.  We are still seeing a slowly improving American economy that is offsetting a slowing global economy.  The most notable examples of this are Ford (NYSE: F) and General Motors (NYSE: GM).  Both automobile giants have shut down facilities in Europe and stated that European demand is extremely weak.  Ford's Alan Mullaly recently stated that "the Ford team delivered a best-ever third quarter, driven by record results in North America... while we [Ford] are facing near term challenges in Europe."  This is a clear indication that America's economy is stronger than many bears want us to think, while Europe's economy is in the cellar.

Two other important economic indicators are improving unemployment data and the housing market.  While the unemployment rate is not decreasing as quickly as we would like, the simple truth is that things are improving.  And with another round of holidays coming up we are hoping to see more seasonal workers held on as full-time employees after the holidays pass.  Similarly, as the housing market rebounds we will see individuals spend more, which will propel the economy.  Assuming these things take place, we are expecting the American markets to be substantially higher over the next four months.

Remember last year?

Another important note to make is what happened last year.  Many of the current fundamentals were worse last year.  For instance, last year the Euro crisis was much worse than it is this year, and the Dow crumbled over 16% during the summer of 2011.  This was compounded by America's debt crisis as well.  Here in 2012, America is in a similar "Fiscal Cliff" crisis and Europe is less of a concern.  Despite these dire circumstances, the Dow surged 18% from Nov. 25, 2011 through May 1, 2012.  And even more surprisingly, one of the most hated stocks on the market, Bank of America (NYSE: BAC), surged about 100% from December 2011 through mid May 2012.  Therefore, when you consider the fact that we are facing similar fundamentals as last year, then we will likely see the Dow sit at 14,854 in late April or early May.  This would be a high teens rally over the next six months.

"14,854... That is crazy!"

At first glance, we will admit the Dow rallying close to 15,000 in five months sounds a bit blasphemous.  First off we will see major changes that are likely already priced into the markets, but these changes will nevertheless cause short term volatility.  Some of these concerns are the end of the Bush-era tax cuts, along with the likely income tax increase on individuals with incomes greater than $250,000.  Not to mention if Congress does not act in time we will see automatic tax increases and severe spending cuts that will likely cause the Dow to make a major downward move and push the economy into another recession.  Despite these very real issues, we are expecting Congress to act accordingly and we will see the markets averting the so-called Fiscal Cliff.  

Full steam ahead

After analyzing the possible political issues, fundamentals, and the recent pullback we are expecting the financial markets to rally fairly well through the first quarter of 2013.  This past week we saw the Dow slink lower, but the selling was not conducive to any type of continued downward move.  And with the holidays coming up we are very confident that a near term bottom has been reached and the market will rally well past 14,000 and possibly reach our 14,800 target shortly after the first quarter of 2013.

sbeefyk1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America and Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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