Daily Gains Letter

Stocks vs. Bonds: Finding the Best Investment Opportunity Right Now

By for Daily Gains Letter |

Why You May Be Stuck with Stocks for NowThe bulls are continuing to ride the stock market higher with minimal resistance from the bears. After some weakness earlier in the year, stocks continue to want to edge higher.

We are not seeing the mass market participation we want to see in a rallying stock market, but this divergence is clearly not a big deal for traders.

The first half of 2014 saw mixed trading, but the stock market managed to edge higher. We saw multiple records set by the DOW and S&P 500, with both indices closing higher for the fifth straight month in June. Not bad given that historical records suggest muted action.

On the charts, the sense is that the stock market is aiming higher. The DOW broke 17,000 last week, while the S&P 500 is eyeing 2,000 and looking higher on the charts, based on my technical analysis. The DOW is riding consistently above its 50-day and 200-day moving averages.

Dow Jones Industrial Average Chart

Chart courtesy of www.StockCharts.com

On the plus, small-cap stocks made a strong rally in June as we saw some money flow back into the higher-risk assets, which technically bodes well for the broader stock market. We are also seeing buying return to the technology sector and the high-momentum plays.

But as is always the case after a rally to new heights, many are calling for a stock market correction.

The chart of the S&P 500 shows the potential of a small correction of approximately five percent. I would view this as an investment opportunity to buy on weakness.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

The reality is that the stock market is heading higher, but we could see some adjournments prior to this.

The economy continues to be steady, but it’s not getting stronger. Investors are okay with this. What is really encouraging is the ramp up in the jobs numbers. In June, the economy created 288,000 new jobs, which easily beat the consensus 215,000 estimate and the 244,000 jobs in May. Better yet, the unemployment rate also fell to 6.1%, the lowest level in nearly six years. The strong jobs report helped to add confidence to the stock market.

The reality is that the stock market is really the only game in town at this juncture. The lack of alternative investment vehicles other than equities is helping to support the stock market. With the 10-year bond yield stuck below three percent (currently around 2.63%), I wouldn’t be rushing out to buy bonds yet. I would rather buy dividend paying stocks.

My advice at this time is to ride the stock market higher, but also keep in mind that we could see a correction, especially if the second-quarter earnings season fails to deliver. At this time, I suggest you only take an opportunity to accumulate shares on weakness, as the bull market remains in place.

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