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Is the Market Action Improving?

May 22, 2018, 10:25 am

Stocks held up very well considering the crosscurrents they faced last week. The first was the 10-year Treasury yield hitting 3.11%. There is nothing particularly significant about 3% in and of itself, but there has been a big increase in outstanding debt from both governments and companies – Home Depot (HD) has used a lot of leverage to buy back shares – since the financial crisis. Any incremental increase in interest rates tends to make Wall Street nervous, as government deficits will soar and companies will need to pay higher interest expenses on that debt.

Another crosscurrent was the recent strength of the dollar. Dollar weakness compared to the euro contributed to the strong earnings season that just wrapped up because it makes American goods cheaper in other countries. The opposite is true with a strong dollar, which could now be an earnings headwind in the second half of 2018.

And lastly, while higher oil prices have been a major positive for energy stocks this year, at some point they will have a negative impact on consumer spending as folks spend more of their money at the gas pump.

Despite last week’s crosscurrents, volatility throughout the market has receded by 50% since late March. While the market as a whole didn’t move much, it’s clear that investors are indeed moving money around instead of crowding to the sidelines. That rotation may not move the benchmarks, but it definitely creates winners and losers among individual stocks.

Drill beneath the S&P 500 headline numbers and a lot of names are moving in the right direction to one day push the market as a whole over the wall of worry the correction left behind. The math is instructive. About 3,400 stocks are up as of last Friday and 1,900 are down, which speaks to the general upward bias that still prevails on Wall Street.

That makes sense, as it would be hard to justify a real negative mood in the wake of the biggest tax breaks in a generation, not to mention the best earnings growth quarter since 2010. But the real story is the way relatively few of the winners are reversing course while close to half of the depressed charts have turned around.

That’s a sign of improving market breadth and a healthy indication that the market as a whole is getting ready to resume its bull run in pursuit of records. Remember, I’m still open to Dow 30k by December 31. That target is only 0.4% farther away than it was back when the year started, so the only thing we’ve really lost in the last few wild months is time.

The bulls will need a little more speed through the rest of 2018, but earnings growth alone is taking enough pressure off the multiples to make it happen.

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