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Still Skeptical of the Rally? image

If you find yourself skeptical about the sustainability of the current run for the roses in the stock market, you aren't alone. Frankly, you can't be blamed for expecting something negative to come out of the woodwork which would send traders into a selling tizzy and toss the major indices right back into their respective trading ranges. Put simply, this is the way the game has been played for nearly two years now.

However, from a big-picture standpoint, let's remember that the frustrating, sideways action seen in the stock market since the summer of 2014 has likely been a consolidation of the big bull that occurred from the end of 2011 through mid-2014. And as I've been saying for many moons now, I have been expecting to see the trading range ultimately resolved to the upside.

Don't look now fans, but this is what appears to be happening. Suddenly the big, bad fears that had kept the bulls penned up are looking a lot less worrisome. For example, the BREXIT is over and investors recognize that the economy of the U.K. isn't going to fall off a cliff this year. In addition, June's Nonfarm Payrolls showed that the U.S. economy isn't at risk of toppling over anytime soon either. Couple this with oil's rebound, the fact that the trend of earnings is starting to head in the right direction again, stable/low inflation, and uber low interest rates, and well, you've got a recipe for higher stock prices from a macro point of view.

And based on the early action in the futures, it appears that the bulls are on a roll right now. The only question is how far stocks will go before the inevitable pullback begins.

S&P 500 - Daily

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However, it might be wise to be wary of the "wait for a pullback" mentality here. Sure, stocks are overbought. Yes, the S&P 500 has run a long way in a very short period of time. And it is true that both our sentiment and mean reversion indicators are starting to wave their little yellow flags. Yet at the same time, remember, that this is the way breakouts work and that when "everyone" is expecting something to happen in Ms. Market's game (a pullback in the near-term, for example) - it rarely does.

Some "Oomph" For a Change

So, while I too am expecting something negative to crop up at any time to give the bears the opportunity to test the bulls' collective mettle, we should recognize that there has been some "oomph" behind this move. And this is something that has been sorely lacking in previous jail break attempts.

For example, our indicator that tracks the "breadth thrusts" on the NASDAQ Composite, hit its highest level seen since early 1987. Yes, I know that's hard to believe, but I checked and rechecked the charts and you have to go all the way back to the mid-1980's to find a higher reading. And while I could discount the indicator by saying the market is different now and these type of indications are much easier to get these days, the current reading is still higher than anything we've seen during the high-speed trading era. As such, it is probably a good idea to sit up and take notice. You never know, the long-awaited breakout may be happening right before your very eyes.

Turning to this morning... assuming the early indications hold, it looks like stocks will enjoy another day of green screens on this summer Thursday. Futures in the U.S. are following global markets higher as Ben Bernanke's suggestions for Japan's central bankers, comments from the Bank of England about future stimulus, a positive earnings surprise out of JPMorgan (which we own in various portfolios), and higher oil prices are all being viewed as constructive for equities this morning.

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 Policies
      2. The State of U.S. Economic Growth
      3. The State of the Earnings Season
      4. The State of the Stock Market Valuations

Thought For The Day:

"Ninety percent of each battle is information." --Napoleon

 

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

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Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided "as is" without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

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Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.