With just over 400 of the 500 companies that make up the S&P 500 having reported first-quarter earnings, the case for the bull market extending its run is rock solid.
Corporate profits are up by 9.05% and rising, with a logical case for 20% gains for 2017 if tax reform is passed in or near its current form. What is most encouraging is that in light of the five tech pillars Microsoft Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL), Alphabet Inc. (NASDAQ:GOOGL), Facebook Inc. (NASDAQ:FB) and Amazon.com Inc. (NASDAQ:AMZN) getting so much attention as they comprise 13% of the S&P, it is other market sectors that are rising on strengthening earnings.
Those other sectors are making a deep impression on fund managers and investors alike. With the exception of the energy and retail sectors, it’s a broad rally that has room to run.
The correction in energy is not isolated. Prices in soft commodities like grains, fertilizer, sugar and other foodstuffs are in decline. Base metals like copper and iron are seeing price erosion, as are precious metals since investors are under the influence that core inflation is going to go very low for longer. Reduced pricing for precious metals provides a counter-lever to inflationary pressures in the services sectors of the broader economy. At the same time, low prices for raw materials is positive for American manufacturers, since a strong dollar buys greater amounts of inputs needed to produce finished goods.
I am most encouraged by the rising tide of optimism surrounding the industrial stocks. The winning streak of better-than-expected earnings from what are deemed the ‘heavy metal’ stocks is truly fortifying to the case for another leg to the bull trend. Big earnings beats and rising guidance from Caterpillar (NYSE:CAT), Honeywell (NYSE:HON), Cummins Inc. (NYSE:CMI), Eaton Corp. (NYSE:EV), Rockwell Collins (NYSE:COL), Stanley Black & Decker (NYSE:SWK), Illinois Tool Works (NYSE:ITW) and Snap-On Inc. (NYSE:SNA) are nothing short of a green light for investors. Those wondering if the U.S. economy has finally reached escape velocity from the long and winding road of 1.0% growth of the past eight years now have an answer. For lack of better wording — America is good to go!
One item worthy of notation is that a growing number of investors today are moving toward passive investing, which has its benefits, but also its drawbacks. The major exchange-traded funds (ETFs) by iShares, ProShares and Vanguard that encompass the industrial sector all have General Electric (NYSE:GE) as their top holding to the tune of a 9-10% weighting of the total holdings portfolio.
Here’s the rub. Shares of GE are trading just one point off the 52-week low and can only be described as a dog with fleas, acting as a ball and chain on these most liquid ETFs. If there was an industrial ETF ex-General Electric, I’d say back up the truck, but there isn’t such an investing vehicle.
As it would be, the most effective way to benefit from the rise of the industrial sector is to construct your own basket of leading names, including the short list provided above. Then activate an aggressive covered-call strategy to lay over it that can generate 20-30% of income on the capital invested over the course of a year. By selling out-of-the-money calls on stocks in such powerful uptrends, one can far outpace the S&P 500 with active investing, hands down.
In fact, one can take it to another level by incorporating the use of Long-Term Equity Anticipation Securities (LEAPS) that afford investors the ability to buy these expensive stocks that trade well above $100 per share for a fraction of the price. LEAPS are essentially long-term call option contracts going out a year or more. When one can control 300 shares of a $180 stock that would cost $54,000 for $10,000 and then sell some short-term, out-of-the-money call option premium against that position and repeat that call sale four or five times per year, the potential for triple-digit-percentage returns is very real.
This long-LEAPS, short-call strategy is called a “bull-call spread” and is the basis of how my trading service Instant Income Trader operates. Our average return on closed trades of around six weeks is 22%, and we’re using stocks like Boeing (NYSE:BA), Broadcom Ltd. (NASDAQ:AVGO), Apple (NASDAQ:AAPL), Northrup Grumman (NYSE:NOC), Lockheed Martin Corporation (NYSE:LMT), Netflix (NASDAQ:NFLX), Facebook (NASDAQ:FB) and MasterCard (NYSE:MA). It is a system that only utilizes “best-of-breed” stocks. It uses tools of the options markets to put into place a total of 10 bull-call-spread strategies that take no more than 10 minutes of time per week.
With the industrial sector coming back to life this past quarter, the possibilities of riding some new winners that are under heavy institutional accumulation are truly exciting from my vantage point. It is not just a big-cap tech and aerospace/defense-led market anymore. America’s factories are humming once again at full tilt and so are the underlying stocks. Click here if you want to profit.
In case you missed it, I encourage you to read my e-letter from last week about the potential effects of President Trump’s tax proposal.