With the economy slowly improving, the fiscal cliff out of the way, Europe avoiding implosion so far this year, and the great rotation trade suddenly all the rage, the question of the day seems to be how much higher the stock market can go from here. Of course there are two sides to this argument. And since I try to be as objective as possible as often as possible, I thought I’d quickly review the key arguments from both sides this morning.
Let’s start with the glass-is-half-empty gang. As I’ve chronicled a time or two this year, our furry friends in the bear camp remain steadfast in their belief that stocks simply can’t go much higher from here. Among the reasons most often cited for remaining negative, there is the overbought condition, the elevated sentiment readings, and what they contend is the generally pessimistic macro outlook.
However, my personal favorite objection to the current level of stock prices offered up by the nattering nabobs of negativism is that the current rally will, just like all others before it since the turn of the century, end in tears. The thinking is that the only reason stocks are up is because of the liquidity being provided by the central banks of the world. And the bear camp suggests that this condition can’t possibly remain in place too much longer.
While I promised to try and be objective and to give both sides some time this morning, I have to admit that I’m already bored with the rehash of the bearish arguments. I get that stocks are overbought and due for a correction. I understand that sentiment is becoming rosy. However, this idea that stocks have to go down big soon because the indices are close to all-time highs is sheer folly – and I’ve found some stats to back up this view.
The good folks at Ned Davis Research Group recently did a study of how the market acted when stocks hit new all-time highs following a bear market. While the 2007 case was obviously a false signal and the S&P 500 quickly succumbed to a devasting bear after the new highs in 2007, the vast majority of such cases since the roaring ’20s tell a different story.
The all-time for the S&P 500, which was set in 2007, is 1565.15. Don’t look now fans, but as of Wednesday’s close, the S&P is less than 3% from that high water mark. (We should not that the mid- and small-cap indices are already in new all-time high territory and have been for some time now.) To hear the bears tell it, if the S&P can take out the old high, sellers will likely be waiting with baited breath (and a sell algo or two). But history suggests otherwise. You see, after a bear market has ended and the S&P then moves to new highs, the bottom line is the market tends to continue movin’ on up for quite some time.
The data shows that since 1928 – a period that includes secular bull and bear markets – after the S&P makes a new high coming off of a bear market, the index has sported a median gain of 18.4% over a period of more than a year. Normally, I would cite the average gains, but the occurrences are skewed by the market’s run in the 1990’s where the S&P moved up 220% over 7+ years.
I will also concede that during the secular bear market from 1965-1982, the new highs following bear markets were fairly brief. However the gains seen after the initial new all-time highs were 14.5% and 10.5% in the late 60’s/early 70’s, which are returns that should not be scoffed at.
The key here is whether the S&P can actually make a new all-time high in the near future. If the bears can get something going for their team and keep the index from closing at new high, then this analysis will be useless – until, of course, the next time the bulls close in on the Promised Land. Remember, once the old high is breached, the odds favor the bulls for quite some time. This is likely due to the idea that retail investors tend to view new highs as a sign that it is safe to get back in the game. So, will this trend play out again this time around? We shall see.
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blindsided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
- 1. The State of the U.S./Global Economy
2. The State of the Earnings Season
3. The State of the European Debt Crisis
The State of the Charts
While it is clear that the trend has indeed been a friend to the bulls so far this year, there remains a fair amount of skepticism regarding the staying power of the 2013 spike. In addition, those seeing the glass as half empty are quick to point out that the rally appears to be losing momentum at the present time. So, when couple this with an overbought condition, rich sentiment, and a lousy Valentine’s day record, it is easy to see why the bears have been unwilling to surrender here.
- Current Support Zone(s) for S&P 500: 1513, 1500
- Current Resistance Zone(s): 1550-65
S&P 500 – Last 3 Months
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
- Short-Term Trend: Positive
- Intermediate-Term Trend: Positive
- Long-Term Trend: Positive
S&P 500 – Last 12 Months
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend – I.E. if there is any “oomph” behind the move.
Below are a handful of our favorite indicators relating to the market’s “mo”…
- Trend and Breadth Confirmation Indicator: Positive
- Price Thrust Indicator: Moderately Positive
- Volume Thrust Indicator: Neutral
- Bull/Bear Volume Relationship: Positive
- Technical Health of 100 Industry Groups: Positive
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide “early warning signs” that a trend change may be near.
- Overbought/Oversold Condition: The S&P remains overbought from both the short- and intermediate-term perspectives.
- Market Sentiment: No change: Our sentiment indicators remain solidly negative.
The State of the Economy
The overall health of the economy is a major input to the stock market. In order to help you stay up to date on all the important economic data, we publish a “State of the Economy” roundup each day. The report summarizes the day’s important economic data in an executive summary, quick-read format and then provides links to the most recent data, sorted by category. Here is a snippet from the recent report:
Most Recent Key Economic Releases:
- Retail Sales Above Expectations in January
Although there has been a great deal of concern about the state of the consumer lately…
Today’s economic releases: Weekly Jobless Claims and Bloomberg Consumer Comfort.
Here is the latest State of the Economy Report
You can also sign up to receive an email alert whenever the “State of the Economy” report is published.
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market’s “big picture” environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
Weekly State of the Market Model Reading: Positive – This tells us that we should continue to give the bulls the beneift of any doubt.
If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.
From The Equity Research Department
At StateoftheMarkets.com, our goal is to provide investors with everything they need to be more successful in the stock market. Here are the latest reports from our research department:
- The Chart of the Day: Prospect Capital Corp – PSEC
- The Focus List – Vulcan Materials and Fiserv Industries are on our watch list today
- The Risk Manager Report for Feb 13
Remember to sign up for email alerts whenever our research department issues a report.
Turning To This Morning…
News that the economies of Europe contracted more than expected in the 4th quarter has put both European bourses and U.S. futures on the defensive this morning. Is this the “trigger” the bears have been looking for to get something going to the downside or just another buying opportunity for underinvested funds? We shall see.
Here are the Pre-Market indicators we review each morning before the opening bell…
Major Foreign Markets:
– Shanghai: closed
– Hong Kong: +0.85%
– Japan: +0.49%
– France: -0.83%
– Germany: -1.09%
– Italy: -1.13%
– Spain: -1.65%
– London: -0.23%
Crude Oil Futures: +$0.02 to $97.03
Gold: +$2.00 to $1647.10
Dollar: higher against the yen, euro, and pound
10-Year Bond Yield: Currently trading at 2.033%
Stock Futures Ahead of Open in U.S. (relative to fair value):
– S&P 500: -5.03
– Dow Jones Industrial Average: -53
– NASDAQ Composite: -11.55
Thought For The Day…Success is not permanent & failure is not fatal. -Mike Ditka
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
Positions in stocks mentioned: none
Wondering what your short-term risk management strategy should be right now? Let Dave M. walk you through how his Daily Decision system works (a 100% rules-based system designed to guide your risk management strategy) Click Here to see Daveâ??s latest video presentation on the â??Adaptiveâ? Daily Decision System
For up to the minute updates on the market’s driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
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