Breakout

5 Reasons Why the S&P 500 Will Finally Breakout to 1600: Nick Colas

Breakout

With each passing day that the S&P 500 hovers beneath its all-time high, thus failing to accomplish what virtually all of its peers already have, pressure is mounting and speculation rising as to if and when its own record-breaking moment of glory may occur. Truth be told, the move to uncharted territory for the S&P isn't really all that important, especially given that the index has put up a nice 9% gain in just ten weeks, but it certainly is the source of great attention amongst traders and investors, both large and small.

Further complicating matters, is the fact that over the past 13 years, the index has failed twice already at this exact level (in 2000 and again in 2007), but as Nick Colas, chief market strategist at ConvergEx Group says in a recent note to clients, "Third Time's A Charm." As he outlines in the attached video, there are five reasons why he thinks this much-awaited breakout is likely to happen. *(To be fair, he also lists five reasons why it might not happen, which are all included in the attached note)

1) M&A Activity

"M&A activity has really picked up and that's an important sign," he says, characterizing the confidence that is required for one company to purchase another as a good indication from the so-called smart money. "M&A levels are running roughly three times above where they were last year."

2) Record Corporate Profits

While profit growth rates have all but stalled, the fact remains that new records are being set, quarter after quarter and Colas says that's a good thing. "The amazing thing here is U.S. companies have been able to put together near-record profits against a very sour background and economic results." As he says, the logic here is that if we can maintain record profitabiltity when things are slow, just imagine what we can do if the economy picks up.

3) Awful Five Year Track Record

At a time when much has been said and written about "the lost decade," Colas is focusing instead on the sub-par half decade performance by the S&P 500 as another reason that bodes well for a move to 1600. By his analysis, the current rolling five year period returns are running at about 16%, which he says is roughly about one-third the long-term historical average, which he thinks "suggests the index is quite cheap."

4) Financial Aren't Pulling Their Weight

In the past, cyclical recoveries in the stock market have been led by the financial sector, Colas says. But that is not the case now. When it is, however, and the financials do start to contribute more to the upward move, he says, it will be much like the story with record profits. More specifically, with Financials still 30% below their all-time highs, Colas thinks the ultimate catch-up period for this most cyclically sensitive sector will have a positive effect for the broader markets as well.

5) Consumer Spending Remains Robust

Despite higher gasoline prices, higher taxes, and still elevated unemployment levels, Colas gains confidence in the stock market via the resilience of American consumption. As he tells it, "after a dip in 2008-2009, consumer spending has returned to the long, slow upward trend since 1995."
As I said, Colas also lists five reasons why the S&P might fail to eclipse its old record, but chief among them is the fact that the Vix is just "strangely low" right now. "When you buy the Vix low, at $12 or $13 they way it is right now, you're buying into complacency and that is not always a comfortable place to be."

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