The Market's Change of Heart

 | Mar 01, 2012 | 1:58 PM EST
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I love it when stocks won't quit that should. It is a sign of a market that's much stronger than we think.

Take Wynn Resorts (WYNN), which is a company I profiled on Tuesday on "Mad Money," using the terrific work of our own Scott Redler. We got what some would regard as subpar numbers out of Macau last night that normally would have caused Wynn to get hammered. But people looked through the so-called weakness of the numbers and recognized some calendar shifts and some difficult compares and decided to excuse them and buy. We have not had a market that was willing to excuse weak data for some time. That's new for stocks, and very 2012.

Or take Perrrigo (PRGO). You know that I have liked this stock forever, but I feared that this year it could run out of positive news flow, because although many drugs are now slated to go over the counter, I didn't think there would be enough to make a difference, to keep the ball rolling. I was concerned that now that the economy is getting better, the chance that people will trade back up, or at least stop trading down to house brands, might at last be upon us. Plus, Johnson & Johnson (JNJ) replaced its CEO, William Weldon, and he had been Perrigo's best friend, but he was simply completely and totally unable to stop the recalls of so many of Johnson & Johnson's products.

It is clear now that people are willing to overlook all of those negatives and instead seize on a positive that came out of the FDA saying it wants more drugs to go over the counter. We don't really know more than that, but it has been enough to get the animal spirits going on a stock that blew away the numbers and then went down -- so often a precursor to much lower prices.

We need to recognize these patterns of forgiveness and optimism for what they are: major changes in how the market is viewing stocks. They are what we call "multiple expansion" moves, meaning we are willing to pay more for the earnings than we were before.

Now, if all that was happening was an expansion of the multiples, that would not be enough, and it can be short-lived. Markets that rally only on rising multiples can devolve into the "greater fool" theory, as we saw during the remarkable and ultimately toxic multiple expansion period of 1998-1999 and the first months of 2000.

But multiple expansion on rising earnings coming out of companies like the retailers and the industrials and even the oils can be sustainable and does not lead to the precipice. The same can be said about the banks, where, if you get even slight revenue growth and we are willing to pay for that revenue growth knowing that it can lead to higher earnings, it can be the holy grail of a bull market.

Keep watching this trend. It could lead us to go higher simply because it encourages people to buy stocks. Remember, if you think you are going to be down immediately on a stock after you bought it, if you think that any bit of news can take down your purchase, you are going to be gun-shy. But when you see stocks rally strongly on good news, even if it is somewhat expected, and not go down on just so-so-news, or even go higher on it, then you have a tape that is kind and even enjoyable.

When you have a tape where bad news doesn't create much of a ripple -- witness that Dell (DELL) is barely down off of a big disappointment -- and when you have a tape where you have better-than-expected news that produces gains like we saw in Gap (GPS) this morning, then you know that this tape says there's room to make money, and you should fight your way in despite all of the talk of bubbles. If anything, the talk of bubbles is creating the ultimate wall of worry that must be built before we can power still higher from these levels.


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