Why The Hesitation?
The S&P 500, NASDAQ, S&P Midcap 400, and the S&P Small-Cap indices all presently sit above all the important moving averages - which I'll define as the 5-, 10-, 18-, 39-, 50-, 100-, 150-, and 200-day MAs. The NASDAQ 100 has now recovered more than half of the decline tied to the recent corrective phase. And the iShares S&P Small-Cap ETF (NYSE: IJR) finished yesterday a mere 0.2% shy of its all-time high. All of which can and should be considered, at the very least, modestly positive for the stock market.
As expected, the earnings parade has been strong so far. The economy is in good shape. Interest rates are behaving. And the stock market's recent bout of extreme volatility looks like it could be a fading memory. So, I ask you, why do you suppose the market is hesitating here? Why is there still a downtrend line intact on the chart of the S&P 500? And why have traders been selling into the close nearly every single day lately?
While we can never know for sure what is going through Ms. Market's mind, and she has displayed a willingness to change her mind at the drop of an algo at times, my guess is that uncertainty remains the key issue. And if there is anything that will keep a portfolio manager from clicking the buy button, it is uncertainty about what may come next in the stock market.
Yet, it is important to note that uncertainty is not the same as out-and-out worry/fear. Yes, it is a distant cousin. But what I'm talking about here is the reason why the current rally remains less than robust.
Remember, when corrections end, or put more aptly, when a new bull leg begins, the move is generally accompanied by an all-important "thrust" signal from both price and market breadth. In short, such "thrust" signals are akin to an "all clear" siren, as the stock market has tended to move higher the vast majority of the time following such signals.
The problem is we haven't gotten any "thrust" signals yet. And therefore, for many, hesitancy lingers.
Hesitancy relating to Fed expectations. Hesitancy about inflation. Trump's next tweet tirade. Trade. Geopolitics. The mid-terms. The potential for a constitutional crisis. And so on, and so on.
From my seat, none of the above is "currently" (a key point) enough to cause stocks to decline precipitously. However, any of the above is enough to cause hesitation when one is considering whether or not to put cash to work today.
On the subject of cash on hand, JPMorgan (NYSE: JPM) suggests that there is a fair amount of it right now. Analyst Dubravko Lakos-Bujas wrote this week that S&P 500 companies, excluding financials, held $2.39 trillion in cash at the end of 2017, which is up from $2.2 trillion in 2016.
Lakos-Bujas goes on to say, "No other time in history have companies held so much cash in a low rate environment."
Enter another bullish bent - the idea of companies putting all that cash to work. The bulls are replete with ways this can help both the economy and earnings. Buybacks. Dividends. Capital investment, etc. And JPMorgan analysts opine that buybacks will hit roughly $800 billion this year, up from $530 billion last year (an increase of 51%). And this, dear readers, is called demand for stocks.
But at the same time, the current uncertain environment could also cause corporate CFO's to perhaps hesitate on implementing those buybacks - even just a little.
Finally, I will confess that I too am guilty of hesitating here. With a substantial amount of new cash needing to be allocated for advisors my firm works with, I am hesitant to simply "bomb in" here. We bought into the panic and added on the retest. So, unless and until I can get an "all clear" signal, or that warm and fuzzy feeling about the stock market action, I am likely to continue suggesting that it is best to "pick your spots" in this environment.
Turning to this morning, it appears that rising yields and concerns about semiconductor guidance are giving the bears a reason to smile before the bell. Thus, it will be interesting to see if dip buyers emerge today or if the hesitancy continues and the major averages break back below key short-term support.
Thought For The Day:
Don't put the key to your happiness in someone else's pocket. -Unknown
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
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At the time of publication, Mr. Moenning held long positions in the following securities mentioned: IJR, JPM - Note that positions may change at any time.
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 constitutes a solicitation to purchase or sell securities or any investment program.
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