Bulls and Positive Price Action Don’t Care About All the Bearish Arguments
Despite a host of bearish arguments, the major indexes have been moving steadily higher, with the S&P 500 hitting new all-time highs. While small-caps (IWM) are lagging and still 4.5% off prior highs, and the Magnificent Seven names are no longer narrow leadership, there has been a steady trend for most of the market, and bulls are feeling quite optimistic but also a bit complacent.
The bearish arguments are obvious. Technical conditions are extended, valuations are aggressive, interest rates are rising, the danger of an economic slowdown is not insignificant, and sentiment is frothy. The problem for the bears is that the price action doesn’t seem to care about these arguments.
On Thursday morning, the market will consider the latest CPI report. It is widely expected to be benign and to confirm that inflation is now well under control, but if there is an uptick, it is likely to generate a strong response.
The most puzzling thing about the market currently is the disconnect between interest rates and equities. The 10-year Treasury has a yield of over 4%, and it is now expected that the Fed will deliver two more quarter-point cuts this year.
The economic narrative embraced by bulls is that less dovishness is not a problem because the economy is still very strong. There are just a few signs of inflation and economic slowing, so it isn’t a problem if interest rates are a little higher and the Fed moves slowly.
Upcoming earnings hold the biggest risk of producing a shift in the character of the market. Companies in the S&P 500 are expected to show earnings growth of 4.7%, which is a decrease from 7.9% in July. Although expectations for earnings are down, stock prices are up 20% this year. Obviously, this means that stocks are now much more expensive than they were earlier this year.
I’ve been struggling to stay in sync with the very bullish mood, primarily because I’m finding so few new buying opportunities. I am riding the long positions that I’m holding but am having difficulty putting more cash to work. Some increased volatility on economic news and earnings would be helpful.
We have some early weakness as we await CPI and weekly unemployment claims at 8.30 am ET.
At the time of publication, Rev Shark had no positions in any securities mentioned.