There is so much more to the stock market rally than actions taken by central banks. There is no doubt that a part of the low (and especially negative) yields scenario is to get funds to seek returns, which means greater risk in stocks, resulting in higher share prices, which is in turn is supposed to trigger that so-called wealth effect.

I understand the United States economy is doing better than most of its first-world rivals. In fact, this rally has been on anemic volume and America hardly has the strongest market in the world.

In other words, there is no real global mad dash to buy American stocks.  As I have pointed out, Americans are dumping American stocks via mutual funds and exchange traded funds.  Meanwhile, consider the awful economic conditions in Argentina and Brazil, and wonder how those markets are up 36% and 31% YTD?  It's because of pro-business governments.  Headline crises are proving to be no problem (match headline with the country) for many markets that are faring as well or much better than the S&P 500.

• Zika virus
• Failed military coup
• Lower oil prices

It’s easy to downplay any upside move in stocks; I think there is too much negativity, but isn’t that always the ultimate buy signal?

Stocks Are Not Cheap

While I have cautioned against too much negativity on a short-term basis, stocks have gotten ahead of themselves. That is why this earnings season is so critical.  Results must beat the Street and guidance must outpace consensus for the second half of the year.

Note that the market is overvalued, but it’s nowhere near historical levels that have signaled crashes; just because this bull market is long in the tooth, it doesn’t mean it can’t get older.  The bottom line is waiting for a top and fooling yourself into thinking you’ll buy at the bottom of an abyss. 

You should always have money invested and working for you, which is not the same as always being fully invested.

The paradox of this market rally is that while it’s harder and harder to find cheap stocks, the most expensive are the ones we normally find shelter in when things are too frothy. This is a conundrum with unlimited irony.  

However, if equities in general have become a safe haven or default place to put cash in a low-yielding world where all four corners are on fire, then it stands to reason that funds would seek out something akin to the old ‘widows and orphans’ names famous for protecting wealth.

Traditional havens:

• Utilities
• Consumer Staples

Oversold high Yield Ideas:

• Materials
• Industrials

 

 

Conclusion & Game Plan

So, who would think that the market would be knocking down new highs day after day, and not be led by technology and banks?  Normally, I would say buy these names, but the fact of the matter is there isn’t a lot of urgency.  Instead, I think we have to look beyond the year-to-date or even the past 52-weeks for a better sense of what is over and undersold. 

That would mean chasing names that might be outside their historical valuation averages.

Yesterday, after the close, one of my favorite companies, United Rentals (URI), posted amazing earnings results and the stock took off.  If you believe infrastructure spending is low-hanging fruit for either presidential candidate, then this stock is still a screaming buy (if you’re a subscriber, it should already be long) even if that doesn’t happen, this is a great domestic investment on the rebuilding of America.

The actions I am talking about include buying industrials and material names on breakouts, all on a name-by-name basis. This doesn’t mean you can’t ring the register; of course, you must have some free cash to take advantage of big air pockets.

The bottom line is that stocks are lofty but not crazy, and these next couple of weeks can go a long way toward justifying valuations or signaling a pullback.  Remember the notion of investing, which means that in the end, you have to frame it all around the next 20 years instead of two weeks. 

Today’s Session

The theme this morning is central banks on pause with the Bank of Japan saying there will be no helicopter money and the European Central Bank didn’t add to its already generous accommodation that includes:

• 0.0% refinancing rates
• -0.4% deposit rates
• €80 billion monthly bond purchase
• Repurchase program through March 2017

The earnings out this morning are very encouraging overall, especially when it comes to the economy.  We’ll have more details for you on the afternoon note.  Let’s see how open shakes out and not force the issue.

Comments

I like that... Central Banks on pause. Let's call it Cenopause!How do we get them to slowly withdraw stimulus? Would that be called Withdrawocut? Ray Weldon on 7/21/2016 10:46:16 AM

Companies that have borrowed money to buy back their stock at some point have to pay the loan back ... will that hurt their earnings? ... I think so. bette mcsheffery on 7/25/2016 2:27:45 PM

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