I've been generally cautious on this multi-month equity rally but, like all good investors, I am keeping an open mind to the opposing case. My concern has been that the lurch upward hasn't been accompanied by anything other than mediocre fundamentals. If stocks are rip-roaring higher, I want to see earnings getting substantially better, for instance. Instead, earnings are stable at best -- and rising interest rates do not auger for higher valuations.
However, one key point I often make is that the stock market is, in reality, a barometer of precisely current conditions. Often a move in a stock or the broad market seems mysterious until later -- when, for example, a company reports great earnings or a takeover is announced. Current information is leaking into the market at a constant rate, so the rally could be reflective of earnings trends that will become apparent only on first-quarter earnings calls in April or May -- or maybe not. But we investors must be open to that possibility, and recheck our theses often.
I do sense an undercurrent of distrust in the rally -- which, counterintuitively, could be bullish -- in the violence of these occasional selloffs, such as Monday's big decline on news out of Italy. These moves remind me very much of the huge one-day rallies that punctuated the long bear markets in 2000 to 2002 and 2007 to 2009. Back then, every so often the market would be up 2% or 3% on a single day, signaling an underlying hope that the bear market was over -- but then the march downward would quickly resume. We are seeing the mirror opposite now: These occasional selloffs mark intense distrust, and then the upward climb continues.
So, in the spirit of keeping an open mind here, I'll go over a solid bull case made this week by eminent market strategist Jeff Saut of Raymond James. Here is the summary of his points:
● Saut is looking for an end to this "buying stampede," marked by 37 straight-up sessions, but he believes the bull market will resume after a modest correction.
● Two technical indicators, buying power and selling pressure, are not signaling a major top.
● The NYSE advance-decline line traded to new highs, confirming upside.
● Major averages are safely above their 50-day and 200-day moving averages, and those lines are rising.
● Berkshire Hathaway (BRK.A), a proxy for confidence in the economy, is making new highs.
● Despite softness in multifamily homes, single-family-home sales are up and inventories down, setting up that important sector for more growth.
● History shows that the longer a year-end rally carries into the new year, the better the year is, on average. That would set up 2013 to be a banner year.
A high reliance on the technicals, as Saut sees them, would argue for the rally to continue. I am less technically oriented than many of our subscribers are, but I still pay attention to them, since they can sometimes be self-fulfilling. In any case -- or, should I say, in all cases when investing -- caution is warranted. Whatever your current thesis is, keep an eye on the opposing case. Sometimes they are right!