Have The Bears Finally Won?
- Short-term weakness aside, the longer-term picture remains bright.
- Corporate cash flow and balance sheets remain strong.
- The short-term correction won't threaten the long-term bull market.
The stock market remained internally week despite a mild technical rally on Tuesday. While the bears retain control over the market's immediate-term trend, there is a question as to whether they will obtain control of the major trend which is been up since 2016. In today's commentary we'll look at signs which point to the bulls ultimately maintaining their control over the long-term uptrend.
Asset manager Laszlo Birinyi once famously stated his Cyrano Principle. Briefly stated, his principle says that "Whenever the market faces a problem which is as obvious as the nose on your face, policymakers will have a remarkably easy time finding the solution." As near as I can recall, he made this statement during the 2008 credit crisis which proved remarkably prescient.
The dynamics of the credit crisis required a far more aggressive response from corporate entities and central bankers alike. This time around, however, the immediate problem facing the stock market is also obvious to everyone but the required response will be far less intensive in nature.
What's more, monetary and economic conditions are far more benign now then they were during the last bear market. This will make it for easier for the informed market players to touch the bleeding before it gets out of hand. In other words, investors should not expect the commencement of a new bear market.
As Dr. Ed Yardeni pointed out in his latest blog posting, corporate America remains fundamentally with the upcoming earnings season expected to contain more positive results due to the effect of tax cuts. Yardeni also pointed out that forward revenues are at record highs for eight of the 11 S&P 500 sectors. Moreover, S&P buybacks totaled $548 billion last year while dividends rose to another record high of $436 billion as of Q4 2017. As Yardeni points out, both measures are good indications of solid corporate cash flows. Sound corporate balance sheets combined with continued economic strength are major reasons for believing the longer-term outlook for equities is still benign.
Source: Yardeni Research
One of the biggest contributing factors to the broad market correction which began two months ago was the interest rate conundrum. A major catalyst for the early February market plunge was Wall Street's fears over the impact higher interest rates might have on stock prices and the economy. Indeed, some of the most intensive selling was seen in interest-sensitive securities in the last two months and if rates had continued to rise much longer it might have been a legitimate concern. That wasn't the case, however, as the two-month-old correction has done at least some "correcting" of Treasury bond yields. Shown here is the 5-month graph of the CBOE 10-Year Treasury Note Yield Index (TNX). While long-dated bond yields haven't come down considerably, every little bit helps since this serves to relieve immediate selling pressure on sensitive assets like municipal bonds and energy funds which have, until lately, heavily populated the list of NYSE new 52-week lows.
Speaking of the new lows, despite Tuesday's rally in the major averages there were still far too many stocks making new 52-week lows. To be exact, 89 made new lows on the NYSE while the NASDAQ saw 94 new lows. The number of new lows continue to significantly outpace new highs and this negative high-low polarity is a continued indication of the weak undercurrent which has plagued the market since late January. Shown here is the daily graph of NYSE cumulative new highs minus lows. As I've continued to emphasize in past commentaries, the trend of this indicator must reverse to let us know that the near-term path of least resistance for equities is no longer down.
As I continue to recommend, short-term-oriented traders and investors should wait for the new lows to dry up before buying new positions. We need to see a few consecutive days of sub-40 new lows on both exchanges to let us know that the market's internal condition has finally improved enough to warrant new purchases.
The good news is that the market's strong underlying fundamental condition will make it easy for any continued weakness to serve as an eventual entry point for institutional investors who will soon see bargain opportunities emerge in several major industry groups. Until recently, much of the selling was concentrated in income funds but now other sectors and industries are feeling the pain of selling pressure. This is actually a positive beyond the short-term outlook since it makes it easier for investors to see the results of the internal bleeding beyond interest-sensitive securities and will at some point encourage value buyers to step up to the plate.
As previously emphasized, however, short-term technicals are the most important consideration despite the stock market's continued strong fundamental condition. Accordingly, I recommend holding off on initiating new long positions and focusing instead on maintaining heavier-than-normal cash positions in what is a turbulent market environment.
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