Good News: The Commodity Price Cycle and S&P 500 Both on Track

I view the stock market’s recent trading action as impressive. The S&P 500 Index has clawed its way back up to the 1,200 level, which is technically significant. Just last year, the index (and others) broke down after a strong run and then recovered meaningfully. While the past can’t predict the future, there is a strong similarity in the share price action.

I think that the broader stock market is reasonably priced and that corporate earnings will be strong enough to be the catalyst for a solid upward move in stocks. How long a little rally might last is unpredictable in this kind of environment. Investment risk for equities is high and the sovereign debt issue hasn’t gone away. I’m certain this issue in Europe will once again be a focal point for investors in the not-too-distant future.

Also impressive is the spot price of oil, which is climbing its way back to the $90.00-a-barrel mark. Silver and copper are ticking higher again and this is a positive signal about confidence in the global economy. And we can’t ignore the spot price of gold, which is persistent in its strength. While there are still a lot of stocks that are down, the commodity price cycle seems to be alive and well.

Without any new shocks to the system, I expect share prices to trade slightly higher from current levels in anticipation of third-quarter earnings season. Like we’ve seen all year, there haven’t been many companies revising their previous guidance lower. The general view that I got out of the second-quarter earnings season is that most corporations are expecting solid earnings in the bottom half of the year. With share price valuations reasonable, this is why I expect a stock market rally based on good earnings news. And, while it’s too early yet, I think the expectation for solid earnings will help the S&P 500 Index climb back above its 200-day moving average.

Here at Lombardi Financial, we continue to talk a lot about our positive expectations for precious metals and gold stocks in particular. This sector remains one of the most attractive for equity market speculators. There have been several mid-tier acquisition announcements in the gold mining industry recently and this consolidation trend is just getting started. Takeovers and mergers are going to flourish in this industry over the coming quarters, because share prices are high and so are bank accounts. It’s a great time to be a speculator in this specific market sector, because the fundamentals are so strong. You have a strong underlying spot price for gold, with the market’s expectation for $2,000 an ounce this year. Gold mining companies are flush with cash from their previous record financial results. And now companies want to bulk up on production, because it’s cheaper to buy another established producer than to go exploring on new properties.

What are the best stocks in this market? For speculators, they are gold stocks. For long-term investors, they are higher-dividend-paying securities.

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