This is becoming a familiar refrain: Stocks, commodities and bonds all remain in strong uptrends, even as the U.S. dollar continues to weaken. Such highly correlated moves can persist for a time, but not indefinitely. Bond prices have moved higher (and yields lower) reflecting deflationary forces at work. Commodities, on the other hand, continue to march higher and are up some 30 percent from their lows, thanks to strong demand from emerging economies. Stocks are traveling with commodities in anticipation of stronger growth here in the U.S., while ignoring the message of the bond market. We may even enjoy some growth for a period, but the rise in commodities simultaneously threatens to bring about a premature end to that growth.
We continue to have serious concerns about the tone of the stock market’s advance. Trading volume has been in a pronounced contraction for months. Last week, and again Monday, we saw stocks move higher even as trading volume has dried up. If you filter out program trading, which accounts for as much as 30 percent or more of total NYSE volume on any given day, you’ll see the market truly is running on fumes. Under healthy conditions, the market advances in an increase in trading activity.
Earnings reporting season is underway once again. So far, we’ve seen companies beat on the earnings front, by and large. That’s not much of a surprise since profit expectations for the third quarter have been set pretty low. But at the same time, companies continue to fall short of sales projections, despite somewhat easy comparisons with the year-ago period.
Ultimately, we need to see an improvement in the top line numbers if stocks are to meet investors’ lofty expectations for bottom line results. Looking back at this time a year ago, analysts we’re overly optimistic with their earnings forecasts. And they are likewise overly confident this time around as well, judging by the economic data rolling in and surveys of corporate spending and hiring plans for the coming months.
We’ve not been all that active with our trading of late. While the next big move is likely to be to the downside, it’s not clear if the market is rolling over yet. And as we’ve seen throughout this rally, being on the wrong side of the trade can be very painful. Sometimes it pays to wait, rather than trading for the sake of trading.