Market Update 01-06-09| Leeb's Market Forecast Analysis and Tips

Last week’s stock market action was quite impressive. Blue chips, as measured by the S&P 500, gained 6.8 percent for the week, while the more economically sensitive small caps were up by a greater amount—8.8 percent on the unweighted average of all stocks traded on the New York Stock Exchange. The weekly breadth of the market was one of the best on record and volume was high for this time of the year, suggesting there’s some conviction behind the buying.

The strength of the small caps is particularly encouraging because if the economic situation was worsening you can bet it would show up in guise of poor relative performance from the little guys. And that’s simply not happening. Indeed, just the opposite is occurring: In the last seven weeks, the small caps have more than doubled the performance of the blue chips, climbing 36 percent in the process.

This fact has gone largely unnoticed by many investors and the media alike. But it’s a statement that speaks volumes about where were headed, at least for the next several months.

Despite the popular averages having not put in a low until the third week of November, the underlying tone of the market has unmistakably been improving since late October. Last week was the second week since that turnaround began that we saw wide-eye relative strength in the broad market. Looking back at more than 40 years of data the only other time we’ve seen similar market action was shortly after the lows in 1982.

While we don’t think we’re at the launching point of another secular bull market (as we were back in ’82), like then, the coming six months could see stocks advance strongly. Judging by the piles of cash sitting on the sidelines and the chatter from those still smarting from the drubbing they took in 2008, that move is likely to catch many overly cautious investors unawares.

The real winners in this next stage should prove to be commodity plays. Gold, in particular, is looking increasingly attractive. The metal likely has some more consolidating to do around its current level, but that will also help to build a stronger base from which to launch the next big up leg in the gold bull market. One reason we’re so bullish: With many of the major currencies around the globe looking vulnerable, the yellow metal stands to be the big beneficiary. We just can’t say when exactly gold will decouple from the greenback, but we suspect it will be soon.

We’re equally enthusiastic about oil and energy stocks right now. Crude has rebounded strongly off its lows for a number of reasons and is back above $50 a barrel. OPEC production cuts, the Russia-Ukraine natural gas dispute and Israel’s incursion into Gaza are all playing a role here. But other, more important factors are at work as well. Better-than-expected economic data here in the U.S. in the last few sessions, for instance, is at least partially responsible for the boost oil has gotten. Saudi Arabia’s price hike for heavy oil bound for the U.S. is also giving West Texas Intermediate some oomph.

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