What If Prosperity Breaks Out?

by: Financial Sense

By Tom Smith

Art Cashin was on CNBC last week. He has been on the floor of the NYSE for many decades. What he hasn't seen isn't worth seeing. To paraphrase him from last week he said it is curious that for many the biggest fear right now is that prosperity will break out. For much of the bull market people have lamented the lack of jobs growth or growth of any other type for that matter. Those more pessimistic on the market have said the only reason the market has gone up is that the Fed has been accommodative.

The taper, started at the end of last year, was supposed to take the wind out of the sails of the market. The bears said that as the Fed reduced bond buying activity the market would roll over. Well, they have steadily reduced their cash spent in the bond market by $10 billion a meeting. The market can see this and do some simple arithmetic and see that the bond buying program will become far smaller over the next several months. The opposite side of the argument is that the Fed is pulling back in the bond market because growth is actually improving.

Last week we had the best jobs release in many years. The actual number was greatly in excess of just about every estimate. That is good for the consumer. The consumer is 70%+ of our economy so what is good for the consumer is good for the market.

There has been an uptick in inflation numbers recently caused, in part, by a fairly substantial increase in rental costs. Depending on how that trend goes, and where you live, this can push people into the housing market. Now we must put things into perspective. There have been cries that there should be stronger growth at this stage in the economic recovery. Then the first sign of an uptick in some inflation numbers and people begin to panic about inflation. The personal consumption expenditures price index has increased in recent months. The index remains below a 2% annualized rate. I'll keep you posted on this trend.

There continues to be more right than wrong with the technical landscape of the market. The S&P 500 remains stronger than the small cap indices. 79% of the stocks on offer in the S&P 500 are in either basing or advancing patterns. That figure has improved considerably over the past several weeks. The picture in the secondary markets remains less impressive. While there has been an increase in the number of strong small cap names since I last wrote, still only 56% of small cap issues are in sound shape technically.

For several weeks now whenever any of the major averages have tested short-term support, buyers have come in. While we can debate the why's and how's of the market, the most bullish thing that a market can do is move higher. There continues to be rotations into new areas of the market. Financials came under pressure earlier in the year as the yield curve flattened out. Financials have come roaring back over the past few weeks. When a particular group becomes extended it is very healthy to see an orderly pullback in those areas as money rotates into new areas.

The advance-decline lines continue to paint a favorable picture of the market. The NYSE conventional and common-stock-only A-D lines moved to new all-time highs last week. I also like to look at the unweighted averages to see if the market is just being driven by a small number of big names. The New York and Amex Uweighted Averages are still in clearly defined uptrends.

In the near term, the market is overextended. Close to 90% of groups trade above their respective 50 day moving averages. Typically, when readings get that high there is some short-term weakness. For the past several weeks pullbacks have remained orderly. Here are the support levels for the S&P 500/Dow/NASDAQ/Russell 2000: 1943/16,740/4338/1167.