This morning, I thought we'd do a quick summary of the market environment (and what to watch for) from the short-, intermediate-, and longer-term perspectives. The idea is to try and succinctly summarize the situation, so here goes...
We have been saying for many months now that the pricing for stocks and crude oil have been joined at the hip. This caused us to worry that the recent rebound in stocks, which was triggered by global central bankers mounting their white horses again and also accompanied by a big rally in oil, would wind up being no more than a countertrend rally. However, the good news is that stocks appear to have decoupled from the price of oil in the last three weeks. And should the decoupling hold, we will argue that traders can turn their attention to more traditional factors such as earnings, the economy, currency movements, the Fed and inflation. But in the meantime, stocks appear to be stuck in a sideways trading range. And while we can argue that this action represents a "pause that refreshes," a break above or below the key lines in the sand (S&P 2075 on upside and 2020 on downside) will likely hold the key to the next meaningful move.
From an intermediate-term point of view, the fact that stocks appear to have decoupled from oil is definitely a positive development. It is also positive that our models designed to provide the current "state" of the economy and inflation, our Leading Indicators Model (which did a fine job of warning us of trouble last May), and my "Desert Island" Model have all improved over the last month. And with our External Factors Model remaining in a bullish mode, it is hard to be overly negative on the outlook for the stock market at this time. However, given that stocks have run a long way in a fairly short period of time recently, traders are likely to turn their attention to the state of the current earnings parade. Thus, we contend that the "message" from Corporate America may hold the key to the next intermediate-term move. On that note, we should recognize that the expectations bar for the current reporting season is exceptionally low. So, while corporate earnings are likely to be negative once again on a year-over-year basis, there is definitely room for upside surprises here.
From a longer-term point of view, it appears that sideways is the new down. While stocks have encountered two corrective phases since last August, the much ballyhooed Armageddon that so many have been calling for, never materialized and the damage on the downside was fairly limited. It is also worth noting that the S&P 500 currently sits in about the same spot it did in late 2014. Thus, the market has essentially gone nowhere for a year and a half. We will argue that this sideways action represents a consolidation of the big rally that occurred since the end of 2012. In addition, we contend that future declines in the stock market will continue to be shallow as global central bankers remain on the case and that the upside may be contained by high valuations. Therefore, we would expect to see the current "sideways slog" to continue, but with an upward bias. Thus, from a bigger-picture standpoint, we believe investors should view any downside volatility as an opportunity to add to longer-term equity positions.
Publishing Note: I am traveling the next two weeks (checking in on my Dad in Illinois this week). As always, reports will be published as my schedule permits.
Thought For The Day:
"A nickel ain't worth a dime anymore." -Yogi Berra
Here's wishing you green screens and all the best for a great day,
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/blind-sided 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 Global Central Bank Policy
2. The State of the Earnings Parade
3. The State of the Oil Crisis
4. The State of Global Growth
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