“Mystery broker’s” take on where we are in the markets…

Q: Will the markets continue to be slowed by the muddy track of the past month, when the investment weather turned less friendly? Or will they regain their footing to reaccelerate in the second half of the year, again confounding the gloom merchants, who keep repeating the looming risks that are both real and well understood?

A: Both.

That, roughly, is the view of this column’s “mystery broker.” He figures the stock market, knocked back into its tetchy, suggestible trading range with the help of a mediocre employment report Friday, is caught in a “consolidation until the next rally”—one that is unlikely to see as much as a 10% decline from the year’s high and thus should reward disciplined buying on significant pullbacks such as the one now underway.

As a primer for the unfamiliar and reminder to the forgetful, the mystery broker is a veteran financial advisor who prefers not to be identified, whose eclectic and thorough market analysis has proven more right than not since before the ‘08 financial crisis. And, no, he is not a household name operating incognito, or a fictional alter ego.

When last heard from in late January, he was looking for stocks to begin a correction before much further progress occurred. While the market had cleared the hurdles he’d set for it to qualify as a bull market rising off the October 2011 low, trader sentiment was giddy, and augured a pullback.

The market overshot to the upside a bit, but soon stalled and is now, in his view, still working off this stretched state. In a new cyclical bull market, as he and some others define it, a good rule is to raise equity holdings as the Standard & Poor’s 500 declines below its 50-day average. That level was breached with Friday’s drop to 1369. His advice now is to accumulate slowly as prices decline, which he thinks could continue up to another 3% to 4% through mid-to-late May.

Whether one considers us to be seven months into a fresh little bull market, or simply in the fourth year of an uptrend that has been stiffly and swiftly tested by 14% to 20% gut checks in two straight years, share valuations and investor attitudes don’t seem overextended. The broker points out that at this year’s index highs, margin debt was down 6% from a year earlier even though the S&P 500 was up 6%.

Apart from his sense of the stock tape, the mystery man is looking for high-single-digit earnings growth for 2012. He is holding to his prescient call of a year ago that the housing market was forming a bottom (with stable prices and increased activity), which animates his expectation that financial stocks should continue outperforming.

His bottom line, for now: “The economic and sovereign-debt problems in Spain may give us a bigger correction. We are in a consolidation phase since the end of March and may have further to go, but the S&P 500 will likely reach new highs this summer. There is even a chance that the S&P 500 reaches 1500 this year. A repeat of the last two summers is unlikely.”

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