Stocks Surging into Final Hour on Positive Earnings Reports, Short-Covering, Fed Comments

BOTTOM LINE: The Portfolio is higher into the final hour on gains in my Semi longs, Software longs and Biotech longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is positive today as the advance/decline line is higher, most sectors are rising and volume is above average. I was recently asked how it is possible for me to be bullish on the market and bearish on energy. First of all, I participated greatly in the early years of the energy stock advance, so I am not the energy permabear that some think. Admittedly, I got out too early, but my small energy-related short position has served its purpose in my portfolio. I am only bearish on the shares now because they are so overwhelmingly loved by investors, and I don't buy into the belief by many that global growth will remain at extraordinary levels for years without significant turbulence along the way. I believe the fundamentals for oil are much worse than is commonly perceived, worse than last year at this time, and that the recent rise has been solely a function of record "paper" demand by funds, not real demand by users of the commodity. Large speculative longs, or funds, have never been more net long crude oil futures in history, just like they were last year before the plunge. I expect oil to begin a substantial decline over the next six weeks as the peak in hurricane season approaches, and this decline should provide the catalyst for another surge in the broad U.S. stock market.

Here are 14 of the hugely positive effects I see from a significant decline in energy prices:

1. lower inflation readings, less hawkish Fed;
2. lower long-term rates, taking some pressure off housing;
3. broad market P/E multiple expansion;
4. lower gold prices, less doomsday talk from the gold bugs;
5. a boost to U.S. growth, a drag on global growth, which is heavily commodity-dependent;
6. an increase in global demand for broad U.S. market;
7. accelerating outperformance by growth style over value style;
8. a lower U.S. trade deficit;
9. a lower U.S. budget deficit;
10. a firmer U.S. dollar;
11. less pessimism by investors, consumers, CEOs, etc.;
12. a pick-up in consumer spending;
13. a rotation out of commodity stocks and into technology, retail, biotech, medical, health care, i-banking, restaurant, gaming and airline shares;
14. less demand for low correlation or negative correlation stock strategies.

I realize that some investors won't view a few of these outcomes as positive. However, in my opinion, a meaningful decline in energy prices would be a large positive for the broad market, as it was last year. Last year, oil peaked at $78.40 on July 14. It then proceeded to plunge $28 in less than six months. The S&P 500 rocketed 16.5% higher over that time frame. The fall in energy prices, in my opinion, was the predominant catalyst for the huge move higher in the S&P 500. While a firmer dollar and lower-than-expected earnings from the energy sector will subtract from earnings growth to an extent, the huge boost to consumer spending, which is significantly more important, more than offsets those drags on earnings. The bottom line is that a meaningful decline in energy prices boosts overall global demand for U.S. stocks during a time of shrinking supply. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering, lower long-term rates, investment manager performance anxiety, earnings optimism and bargain-hunting.