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Tax Increases Will Pop Market Rally: Trader

As the first quarter comes to a close, the Dow is barreling toward 11,000, fueled by low rates, earnings optimism and typical end-of-quarter buying. But one thing could pop the rally: Higher taxes.

NASDAQ
NASDAQ

"I think you're probably going to see the highs for the year sometime in the second quarter or early third quarter — probably low to mid 1200s on the S&P," said David Rovelli, the managing director of equity trading at Canaccord Adams.

(Click here for the latest update on the market.)

"Then, people will come to the reality in the second half that a lot of adjustable-rate mortgages are resetting and taxes are going up on the rich," he said.

"Our [U.S.] debt is going to be increasing and taxes will be raised year in and year out," Rovelli explained, referring to the recently signed health-care legislation, which is set to increase income and investment taxes in the next few years.

So how do you trade the ascent?

Rovelli said tech is blazing the trail — notably Apple .

"As long as Apple goes higher, the Nasdaq goes higher," he said.

And, he thinks semiconductors could see another leg up in the meantime.

"Semiconductors usually have the incentive to lead the market higher — they're in everything," he said.

Exhibit A: Qualcomm , which makes chips for cellphones and other gadgets, today raised its earnings and revenue forecast.

Rovelli is looking at the Philadelphia Stock Exchange semiconductor index to see if it can hold for a few consecutive days above 370.

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