Wednesday's Market Minute: Enjoy, Bulls, But Don't Overindulge

For the first time in a long while, there is some legitimately solid logic to be being bullish. The Fed seems to be preparing for a slower approach, and big tech companies that are trimming the fat are being rewarded, not punished, for their efforts. Expectations for COVID-economy winners have fallen closer to in-line with reality, allowing for some degree of positive surprise in the world of cloud, e-commerce, and advertising businesses. As a result, performance breadth is expanding across the stock market in an historically rewarding way.

According to Schwab’s Michael McKerr, enough companies are rallying to trigger a “Whaley Breadth Thrust,” a ratio of advancing to declining issues that signals the market was overbought in the summer. In the 29 previous instances of such an event since 1970, stocks were higher a year later every single time. Not bad.

Meanwhile, short-term traders are salivating at the possibility that the latest attempt by the S&P 500 to break through its bear market downtrend line at 4,000 may be the real thing. It seems reasonable to think a breakout rally would follow if that happened, but bulls should be careful not to overindulge. 

The market also expects the Fed to cut interest rates this year, and that seems unreasonable. Unless of course, there’s a big drop-off in the economy – so that logic’s a bearish catch-22. And while inflation does look like it’s peaked, it did the same thing in the 70s before making a huge comeback.

And yes, Wall Street analysts have lowered their expectations for many beaten-down tech names, but in most cases it’s a matter of being less ridiculously bullish than a year ago, but still ridiculously bullish. Take Apple for example: the average price target today is $172, down from $190 a year ago but still calling for a push back to near the recent record. 

I’ve always found the dot-com period to be the best analog for today, not just because of the froth in tech valuations but also because of the role interest-rate hikes had in strengthening the U.S. currency and popping the bubble. When the dollar peaked in that cycle, the bottom for stocks came shortly after. Granted, today our inflation picture is a whole lot different, but if the dollar really did put the high in, it’s as compelling a case for the low in stocks as any I can think of. 

These all may be good reasons to nibble, but there's nothing more connected to stock prices than earnings, so bulls should not overindulge. The odds that a recession will inevitably cause a painful puke are still too high.

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