Buying Into a Recovery

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The stock market has had a great three-week run. The media covered the fact that the first quarter was the best since 1998. While that is true, the major indices were all negative on the year exactly three weeks ago today. The reality is that it has been a pretty good short-term run for stocks.

Since mid-March, what events have taken place to placate investor concerns? Oil has risen as a third front opened when the U.S. military started bombing Libya. While that mission is supposedly ending, time will tell how uninvolved our troops and missiles really are.

The Japanese nuclear crisis is not yet under control. If anything, we are learning that they are dumping vast amounts of radioactive water into the ocean, and radiation contamination is spreading further from the crippled reactor. They claim to have fixed the leak, but that was only yesterday. So that can't be the driving force behind the market's recent run.

Rioting and deaths are occurring on a more widespread basis in the last few weeks in the countries of Syria, Bahrain, and Ivory Coast. The market's rise cannot be attributed to any newfound peace dividend.

The European debt crisis seems to be expanding. Portugal was downgraded again on Tuesday. Greece, post-bailout, was downgraded well into junk status to "BB-" just last week. Ireland, a few short months removed from accepting bailout funds, is not only in need of more money already, they would like to renegotiate the payback terms to a more manageable rate. In other words, they can't afford the current provisions of their "loan." None of this is positive news.

Here at home, corporations appear to be flush with cash and merger mania is in full swing. The Fed's quantitative easing programs have helped the "rich get richer," so to speak, as entities with cash can buy what they want at discounted prices. Whether it is individuals with money stimulating retail or corporate America buying undervalued companies, money is moving.

One look at the SPDR S&P Retail Fund ( XRT) and it becomes apparent that consumers are spending. XRT holds approximately 94 U.S. publicly traded common stocks that deal in retail. Everything from Amazon ( AMZN)to Wal-Mart ( WMT), including leaders like Priceline ( PCLN) and Netflix ( NFLX), are in this ETF. No stock has a weighting over 1.5%, so it really is the broad participation of rising stocks that is driving XRT higher, up 7.6% year to date.

The average price-to-earnings ratio of the stocks is 17.8. It also pays a 1% dividend yield while you hope for future growth of earnings. Despite the recent drop in consumer confidence as reported by the recent University of Michigan survey, consumer spending (for those who can) appears healthy.

Of the major market sectors, only energy (for obvious reasons) and industrials (think a weak U.S. dollar) have provided investors with better returns so far this year. XRT broke from a multi-week base recently and closed at $51.97 Tuesday. It should have a near-term run to $54 per share; however, if we actually have a "real recovery," XRT could run as high as $70 per share.

There is plenty of bad news globally. It is not clear if the economy can stand alone without the Fed's support. But what is clear is that there is plenty of liquidity in the system that allows those with cash the ability to buy things. Whether it is stocks or stuff, retail is benefiting. Should XRT continue its uptrend, it could provide investors with a great opportunity to profit as others spend their money.

At the time of publication, Slusiewicz was long XRT, though positions can change at any time.

Jerry Slusiewicz has over two decades of professional investment experience. He has worked with individuals and institutions to manage monies for both short and long-term investment horizons. This extensive experience through various stock and bond market cycles enables him to offer a unique blend of professional investment counsel and personal service.

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