You are looking at what a bull market is supposed to be like. What makes for a bull market?
First, and most important, a bull market must climb a wall of worry. At no point can there be joy and celebration of a rally or a new high. All of our biggest advances have come on the backs of gurus who emerge after a couple of down days and say they are scared or worried that valuations are too high and the whole edifice is a dangerous one. Any market that is dependent upon a couple of people talking it up who then go negative isn't per se a good one.
But what I like about what happened when some very high-profile bulls get cautious is how they immediately sow and breed lots of talk about how there is too much complacency and that the market is really susceptible not to a 3% to 5% correction but a wholesale repeal of a huge chunk of the advance. I always like to hear that 20% to 25% decline chatter because it shakes out all the weak holders. All advances come on the backs of the weak holders who are shaken out, leaving only true believers remaining. As long as there are flip-floppers who are given credence in the media, and they do their flip-flopping, we are going to have that wall of worry that's so needed to scare the sunshine bulls and the summer optimists. They had Russia-Ukraine going for it, but we seem to have decided that it's a regional conflict without much staying power for now. Oh, and once again, I have to point out that the sell-in-May crowd got it wrong and should adopt my mantra of sell bad stocks in May and go away.
Next, you need some real leadership. My favorite leadership is always the transports. That's because these are most sensitive to commerce. When commerce is strong, earnings are going to be strong. Several stocks come to mind. Look at how UPS (UPS) and FedEx (FDX) are breaking out. They are the personification of strong business, as goods need to be shipped. Same with the rails. When you look at the breakdown of the rail cargos that are so strong, you are going to see autos, wood, chemicals, intermodal (pure shipping) oil and coal doing well. What a terrific cross-section. And don't dismiss coal. Utilities use a lot of coal when they are humming so they, too, are a terrific gauge of economic activity.
You need the banks to do well. Banks provide the credit you need for an economic expansion. They have been horrendous performers until today. They can really change the coloration of the "tape," or the market action, because there are so darned many of them. We have the right banks leading, the big money centers, as they have been the ones in the crosshairs of the government. You see that run its course and the price-to-earnings multiples will start to expand.
You need retailers to rally. We have let a couple of large discount merchandisers cloud or judgment about the group: namely Wal-Mart (WMT) and Target (TGT). I think that's a big mistake as they are both executing quite poorly. Target's a well- known fiasco that I think can catch fire with new management. Wal-Mart's just missing the mark.
But who isn't? How about the dollar stores, which have truly become must better merchants and are now nipping at the heels of Wal-Mart. You know who else is and no one talks about it? The drugstores. It's almost as if the Wall Street analysts don't even talk about these stocks but Walgreen (WAG), CVS (CVS) and Rite-Aid (RAD) are taking very big share from everybody else in retail.
We know the Gatsby index is on fire, and that's all good for Tiffany & Co. (TIF), Nordstrom (JWN) and Michael Kors (KORS), which reports this week, and I think's having a good quarter I know that J.C. Penney's (JCP) stock has been heavy. But the business has been strong and I think it is a buy. Home Depot (HD) had a fantastic quarter and has taken share form the likes of Wal-Mart.
We would like to see housing do better and, right now, the housing stocks are embracing the better weather and the lower mortgage rates. Toll Brothers (TOL) will tell the tale this week, but after a prolonged period where housing has cooled, I wonder whether lower rates can now reignite the group.
Remember when we were concerned that the highly valued biotech and software-as-a-service (SaaS) stocks rolled over, and many people who have never studied history believed that these stocks would have to infect the rest of the market? It just didn't' happen.
More important, the rollover in the SaaS stocks started with the pirouette that Salesforce.com (CRM) did when it reported at the end of February. Remember that pattern? The stock ran and then plunged, and going down to $48 from $68, even as the quarter beat all expectations. Now what happened when Salesforce.com reported last week? Pretty simply, it plunged -- and plunged hard -- even though it reported an even stronger quarter. It has since reversed and is now nicely above where it has reported. That's a terrific sign for the rest of the group. Oh, and the slow-growth techs like Apple (AAPL) and Cisco (CSCO) are acting fine, too. I would be a buyer of Oracle (ORCL) and Microsoft (MSFT) on today's weakness.
As far as biotech is concerned, here was a group that was overwhelmed by new supply from initial public offerings. The bloodshed was unfathomable. However, the underwritings finally got shutdown and ever since then, the big guns -- Biogen Idec (BIIB), Celgene (CELG), Gilead (GILD) and Regeneron (REGN) -- have started to roar back. I think that the analysts who had turned cold on these stocks are beginning to turn back to them. If you feel as if you missed the move in the big ones, I think that's wrong. There's more upside. But the two specs I like the most are Seattle Genetics (SGEN) and Isis (ISIS), the latter of which we heard from last week.
The market loves growth wherever it can find it, and I think that the growth in the oil patch is so noteworthy that it has played a role in the advance. The majors have all been terrific, but this is a market that thrives on stocks like Continental Resources (CLR), Cimarex (XEC), Pioneer Natural Resources (PXD), EOG (EOG), Carrizo (CRZO) and so many others.
Finally, you need a market where there's verification of value. What could be more of a verification than today's huge offer by Pilgrim's Pride (PPC) for Hillshire Brands (HSH), which comes on the heels of the huge offer by Hillshire Brands for Pinnacle Foods (PF)? I know the food group has no growth, but what these deals say is that the stocks are being kept down because of that lack of growth, but that they have tremendous value to others. We know that Pfizer (PFE) walked away from AstraZeneca (AZN) but there is still an urge to merge with foreign companies to take advantage of overseas cash and lower tax regimes. The real business people see real value in companies, and that's exactly what you need to see after a big run like we have.
Now, if you go back to the top, the real grist for the bull mill is the need to have shakeout pullbacks. We now have had a real advance so we are, of course, due for a little comeuppance. Just remember that when the same guys apologizing for going bearish are now bullish, you are liable to go lower before you go higher. But they will change their minds again and go negative, giving you an entry point to do some buying.