Chilly Winter Will Offer Hot Stock Buys As Market's Bull Run Still Has Legs

By , Contributing Writer, Money Morning •

Stocks swept higher over the past week as investors swooped in to pick up bargains lying on the stock exchange floors. It did not matter if they were in Asia, Europe or the United States. If they were down 10% or more in the past month, they were vacuumed up.

The Dow Jones Industrial Average rose 2.6% for the week, the Nasdaq Composite went up 2%, the Standard & Poor's 500 Index climbed 3% and the S&P 400 Midcap Index rose 3.2%. Developed markets overseas rose 3.9%, emerging markets jumped 5%, gold increased 3.7%, crude oil rose 6.5% and silver was the star, up 9.4%. The U.S. dollar, which has been driving the bus, fell 1.2%, making the equity gains possible.

Crude futures busted through the $88 per barrel level that has proven to be resistance three times this year. It was fair to expect the resistance to hold again, as there are forces in the Middle East and elsewhere that do not want to allow prices to rise to demand-destroying levels, but traders made it happen.

WTIC (Oil - Light Crude - Continuous Contract (EOD)) INDX

Now there is virtually no resistance until $100, which makes a lot of sense. Crude oil is the only major commodity that is not trading near multi-year highs, and that is because of the concerns that economic growth in developed countries does not support a build-up of inventories. As that point of view changes, the $100 level last seen in October 2008 amid the credit crisis will act as a magnet. And a rapid upward repricing of all stocks in the energy complex will follow.

To get a better feel for whether this might occur, keep an eye on the weather reports. Europe is enduring a massive freeze here in early December. Dozens of major airports on the Continent have closed due to heavy snow, roads are blocked and Eurostar international rail service has been canceled. The unseasonable cold snap has been thought until now to be a fluke, but climates are changing and old views about norms are being challenged.

One of the effects of global warming has been a lot of ice in the Arctic released into the northern seas. This is fresh water, so it is diluting the Atlantic Ocean's natural salinity by just enough to matter. Since fresher water freezes at a higher temperature than saltier water, the Atlantic coast of Europe has become much colder than normal -- in some cases by as much as 10 degrees. Then when the wind blows across this colder water, it carries this icier weather onto the landform.

(SPDR S&P Oil & Gas Equipment & Services Index) NYSE

The net effect is a continent that is on track to become persistently cold at a time when oil and gas prices are around the same as they were in balmier times. This must be one of the reasons we see crude oil prices barreling past resistance, and coal prices at their strongest levels in months.

There is an investment opportunity here in all the oil and coal funds, such as SPDR Oil & Gas Equipment & Services (NYSE ETF: XES) and Market Vectors-Coal ETF (NYSE: KOL) as Europeans buy more heating oil, natural gas and coal to stay warm.

Technically Speaking

Breadth in the past week was positive, with advancers beating decliners by 3-1. The number of new highs on Friday was about the same as Wednesday and Thursday at 695, while new lows slipped a bit to 71.

The reason that there were not more new highs: Many of the stocks that performed well during the past month's global swoon treaded water this week. Red-hot stocks like Neflix Inc. (Nasdaq: NFLX), Chipotle Mexican Grill Inc. (NYSE: CMG), F5 Networks Inc. (Nasdaq: FFIV) and even Apple Inc. (Nasdaq: AAPL) were shunned in the rush to grab bludgeoned financials like Bank of America Corp. (NYSE: BAC) and JPMorgan Chase & Co. (NYSE: JPM).

Elsewhere, the key drivers of success this week were better-than-expected manufacturing data, and the fact that the European Central Bank followed through on expectations to extend emergency liquidity facilities into the next year. There was a fear that one of the hosts of the global liquidity party was going to take away the spiked punchbowl, and that was just not a pleasant thought.

Among sectors, the best were financials, materials, energy and retail, while consumer staples pulled up the rear. Treasuries, municipal bonds and corporate bonds were down as investors fled defensive investment for the glories of risk taking. I've been saying that a beta chase was likely into the end of the year, and this is what one looks like.

Looking forward, you might wonder how the market has done historically over the next 30 days when a session in which 90% of stocks rise, as occurred Wednesday, is followed by a day when 80% of stocks rise, as occurred on Thursday. Jason Goepfert of SentimenTrader.com asked his database this question, and it turns out it has occurred 22 times since 1995. And prices rose during the next three weeks 86% of the time, with an average return of +3.9%, which is much higher than the average 30-day return.

This makes sense. When you have a liquidity flood and stocks are considered cheap, interest rates are low, earnings are growing and central banks are not standing in your way, it's an ideal recipe for a strong market. And that's what we have.

The Week Ahead

Monday: No reports scheduled. Earnings: Dollar General Corp. (NYSE: DG), The Pep Boys (NYSE: PBY).

Tuesday: Before the bell, ICSC-Goldman Chain Store sales report for the past week. Prior was a 0.5% gain. Also, Redbook Chain Store, prior was +0.6%. U.S. consumer credit for October, prior result was $2.15 billion. API crude oil inventories reported at 4:30 p.m. ABC Consumer Comfort at 5:00 p.m. Earnings: AutoZone Inc. (NYSE: AZO), H&R Block Inc. (NYSE: HRB), The Men's Wearhouse Inc. (NYSE: MW).

Wednesday: MBA Mortgage Purchase Applications at 7:00 a.m., prior was a 1.1% increase. Then Department of Energy crude oil inventories will be reported at 10:30 a.m. Earnings: Costco Wholesale Corp. (NYSE: COST), Diamond Foods Inc. (Nasdaq: DMND).

Thursday: Initial jobless claims will be reported at 8:30 a.m., prior was 436,000. At 10:30 a.m., EIA will report natural gas inventories. Earnings: Esterline Technologies Corp. (NSYE: ESL), John Wiley & Sons Inc. (NYSE: JW.A), Brown-Forman Corp. (NYSE: BF.A), Titan Machinery Inc. (Nasdaq: TITN).

Friday: Before the bell, the U.S. trade balance at 8:30 a.m., the Michigan Consumer Sentiment report, and at 2:00 p.m. the Treasury Budget.

[Editor's Note: Money Morning Contributing Writer Jon D. Markman has a unique view of both the world economy and the global financial markets. With uncertainty the watchword and volatility the norm in today's markets, low-risk/high-profit investments will be tougher than ever to find.

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