What a difference one week makes. All the concerns that were ostensibly responsible for the stock market’s 7% decline in January have already been forgotten. It appears investors are bound and determined to push the markets back to the highs.
The markets were up four out of five days this week. Clearly, by Friday, the averages seem to be running on fumes so a bit of a pullback would not come as a surprise. Several technical indicators are screaming overbought conditions. Yet, short sellers beware. It is going to remain very difficult to make any money betting against this market.
The question you may be asking is what happens once we regain the highs. Do we forge ahead or will there be a period in which the markets trade in a range? The likely scenario is a range bound market for a few months as the fundamentals catch up to the price level of these equity indexes.
This earnings season did nothing to heighten expectations that companies will be able to continue beating estimates. Less than half of all companies reporting so far have beat estimates. Most came in on the money, while a minority failed to live up to expectations. That would make this quarter’s numbers a net neutral.
Naturally, just about every company that has disappointed has blamed the weather for their results. Even though this winter’s brutal storms have definitely impacted American businesses’ bottom lines, I suspect it is an all-too convenient scape-goat but it may give us hints to what is ahead.
Most economic data reflects what has happened in the past, so I suspect that we will see some disappointing numbers over the next month or two. There will be the usual debate among pundits on whether that weakness reflects a one-off, weather-related slow-down or something more threatening such as a slowdown in underlying economic growth. It could furnish an excuse for the markets to slow down or even mark time until the future is a little less snow packed.
I say hogwash to those fears (if they occur). The economy is growing and will continue to grow throughout the year. If there is any weakness in the stock market because of a perceived slowdown, that, in my opinion, would be another opportunity to buy the dip and nothing more.
In the meantime, you may have noticed that the politicians in Washington are playing nice. Color me cynical, but this week’s passage of the debt ceiling is all about mid-term elections and nothing more.
Republicans and Democrats are desperately trying to repackage their ineptitude before November. Both sides are hoping that if they drop their penchant for confrontational politics now, the voter will actually believe they are turning over a new leaf and should be given a ninth or tenth chance to perform the duties they were elected to perform. It is all smoke and mirrors and you deserve what you get if you fall for it.
The S&P 500 Index is only 12 points away from its former high. If you were thinking of putting new money to work this week, I would hold off and see what happens. We could very well drop back to 1,800 or a little lower so keep your powder dry for now.