Daily Gains Letter

No Place Left to Go, Institutions Buying

By for Daily Gains Letter |

190313_DL_clarkWhat goes up will come down. But the action is the action, and if you own the stock market, you should be making good money these days.

The price action in the stock market and most blue chips has been very strong, obviously. But trading volume hasn’t spiked with prices; it’s been consistently flat during the recent run-up. There is tremendous pressure now on first-quarter earnings season to deliver the goods. If it doesn’t, this will be the catalyst for a stock market correction.

The recent breakout in the stock market is reminiscent of the action at the beginning of 2012 when stocks crossed their 200-day moving average on the upside. The market advanced strongly for the first three months of 2012, then retreated on first-quarter earnings news. This year, a similar scenario seems likely, as the stock market is absolutely due for a break. The stock chart for the Wilshire 5000 total market index is featured below:

dl_0319_chart1Chart courtesy of www.StockCharts.com

While a great number of companies are expected to report flat comparable earnings in the first quarter, many of the current stock market leaders have seen strong increases in estimates over the last 30 days. Countless Dow stocks are seeing a significant increase from Wall Street in their earnings estimates, for this year and next. Some include United Technologies Corporation (NYSE/UTX), The Home Depot, Inc. (NYSE/HD), The Walt Disney Company (NYSE/DIS), Pfizer Inc. (NYSE/PFE), General Electric Company (NYSE/GE), and Wal-Mart Stores, Inc. (NYSE/WMT).

Increased earnings estimates are a bullish indicator, but it is just one of many. The stock market is really charged up on slightly better economic news, pent-up demand to buy, and the fact that there is no other asset class for institutional investors to put their money to beat the rate of inflation. It is a supercharged quandary.

In terms of investment strategy, I expect the stock market to actually trade off of revenues, more so than bottom-line earnings. To keep buying, all institutional investors want to see is quantifiable growth.

The previous earnings season was pretty underwhelming. Plenty of corporations, large and small, did not meet consensus in at least one financial metric. Right now, there is a lot of cheerleading going on, and Wall Street investment banks are publicly becoming more bullish. Sustainability of the current stock market rally is highly suspect. The numbers from corporations have to come in solid for any of this to have staying power. In fact, they really need to convincingly beat the Street.

Recent data proves that there is price inflation in the Main Street economy, but the Federal Reserve views it as tame. To some degree, just like in the recent data on retail sales (which doesn’t adjust for inflation), first-quarter corporate earnings could be padded a bit by these rising prices.

The stock market, regardless of its past, is still likely to keep ticking higher with the interest rate cycle and monetary policies favoring this asset class. And institutional investors have nowhere else to go. How it all ends is going to be messy.

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