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Is The Wall Of Worry Crumbling?

Daily State of the Markets
Friday, June 6, 2014

With the stock major averages improving almost daily, the mood of the market is definitely on the mend. But think back... How long ago was it exactly that just about everyone on the planet was absolutely, positively sure that the stock market was going to take a dive? Remember all the talk about stocks being in the "sell in May and go away" period? And lest we forget, the second year of the Presidential cycle has been a big loser. And don't forget about the "mo-mo meltdown" that was supposed to drag the market into the tank. Oh, and then Russia was on the brink of starting WWIII, right?

A Very Large Wall of Worries

Thus, one couldn't be blamed for possessing a pessimistic attitude of late. Heck, even the usually upbeat David Tepper, who has an admirable track record running Appaloosa Management, told fellow hedge funders last month in Las Vegas that they should avoid being "too frickin' long" right now and that it was "nervous time" for the markets.

Recall also that stocks came into 2014 on a roll and many thought the indices had gotten "ahead of themselves." Then a really long stretch of really crummy winter weather caused the U.S. economy to stall out. And with all the mini crises occurring, the slowdown in China, and the fact that the Fed would indeed need to remove the punch bowl at some point, many worried that the economy's soft patch would take a turn for the worse.

So, what has the stock market done in response to what has felt like an insurmountable wall of worry? Climb it, of course.

S&P 500 - Daily

Yep, that's right; the S&P 500 has made a series of new all-time highs over the last two weeks. The venerable index has been up 9 of the last 11 days and hit fresh new all-time highs 7 times along the way. So, take a quick peek at the chart above and ask yourself if there is anything at all wrong with that picture.

Another of the bear camp's complaints has been that the S&P was going it alone in its march to the Promised Land. But don't look now fans, some of the other indices are starting to fall in line. First, there is the Dow...

Dow Jones Industrial Average - Daily

Then there is the Mid-cap index, which hit a new all-time high yesterday.

S&P 400 Midcap Index - Daily

And while it may not be an all-time high, the NASDAQ 100, which, of course has plenty of tech and mo-mo constituents, isn't faring too bad right now.

NASDAQ 100 Index - Daily

Oh, and unless the bears can get something going in a big hurry, it appears that there are breakouts taking place on the NDX and Midcap indices.

Okay, okay, it is fair to admit that there are still some "issues" on the charts these days. For example, the NASDAQ is not at fresh new highs for the cycle - but the index does appear to be closing in!

NASDAQ Index - Daily

And since this is turning into yet another chart-fest, we would be remiss if we didn't take a look at the Russell 2000, which is where most of the damage was done during the momentum meltdown.

iShares Russell 2000 ETF (NYSEARCA:IWM) - Daily

As one can plainly see, the IWM is still in a world of hurt when compared to the Dow or S&P. However, as has been discussed in previous missives, history shows that the high fliers don't need to "lead" the way back. No, they just have to stop going down. And the chart above makes the case that the recent downtrend has indeed been broken.

What Gives?

An awful lot of the macro-view traders must be scratching their heads right about now. While the stock market could certainly begin a decline at the drop of an algo, the bottom line is that stocks have been movin' on up when all the deep thinkers figured they should be heading lower. And inquiring minds want to know why.

It's the Economy...

To be sure, the state of the economy does not ALWAYS drive stock prices. However, when everyone is worried that China, Europe and the weather-induced slowdown in the U.S. will kill the stock market, the outlook for the economy becomes the focal point.

Remember, it isn't about what the economy IS doing. No, in this instance, it's the OUTLOOK for what the economy WILL do that truly matters. And the bottom line is, as David Tepper mentioned on Thursday, a lot of the macro worries have dissipated.

Worries Receding

As Tepper told the SALT conference in Vegas last month, there were a handful of macro worries to be concerned about including:

  • US Growth
  • China's Growth
  • Europe's Growth
  • The Ukraine/Russia Situation

However, Tepper told CNBC's Kate Kelly on Thursday that he is now a little less nervous today. Here's why...

First, Mario Draghi made it clear that the ECB is on the case. While Super Mario did not USE "the Bazooka" yesterday, he did show it off a little. The ECB cut rates, moved to negative deposit rates, created more LTROs, prepared for an ABS purchase program, and talked about QE if it was needed. Thus, Mr. Draghi was making good on his threat to "do whatever it takes" to thwart the credit crisis in Europe.

Next up is China. While the Chinese are not embarking on post-2008 type of stimulus programs or cutting rates in a big way, they ARE doing some stimulus and moving toward an easier monetary policy. Therefore, the argument can be made that the PBOC is also on the case.

While the Russia/Ukraine situation is likely far from over. It also appears that Mr. Putin isn't overly anxious to do something stupid - at least not right away. So, this concern has been placed on the back-burner.

Then there is the U.S. While the economy clearly stumbled in response to a brutal stretch of winter weather, it now appears to be rebounding nicely. As such, the dip in GDP during the quarter will likely be offset by a robust Q2 print. And THIS is what a lot of the improvement in the stock market is all about.

The Bottom Line

The key at this stage would appear to be that the outlook for growth is not as dour as it had been. The economy is improving. Earnings are improving. And there is some inflation afoot, which at this point in the game, is a good thing.

So, while the current joyride to the upside could end at any moment, let's remember that stocks usually need a pretty good reason to embark on a meaningful decline. And right now there just doesn't appear to be one.

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Turning to This Morning...

All eyes are on the lU.S. Labor Department this morning as it is Jobs day. Job growth in May is expected to have pulled back a bit from the April level, however analysts are still expecting to see 210K new jobs in the report. Asian markets were mostly lower while European bourses remain positive a day after the ECB rate cut. Here in the U.S., futures are slightly higher ahead of the Nonfarm Payrolls and Unemployment numbers.

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:
- Japan: -0.02%
- Hong Kong: -0.29%
- Shanghai: -0.53%
- London: +0.36%
- Germany: +0.33%
- France: +0.49%
- Italy: +0.83%
- Spain: +1.16%

Crude Oil Futures: +$0.27 to $102.75

Gold: -$0.50 at $1252.80

Dollar: higher against the yen and euro, lower vs. pound.

10-Year Bond Yield: Currently trading at 2.572%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +1.00
- Dow Jones Industrial Average: +20
- NASDAQ Composite: +2.20

Thought For The Day...

Try not to let success go to your head or defeat into your heart...

Positions in stocks mentioned: none

Follow Me on Twitter: @StateDave


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