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3 Reasons Why This Rally Is Real and Will Last


A few days ago I was going through a mental exercise trying to list all the headwinds and tailwinds that this rising stock market is facing right now. I'll be honest, coming up with the cons was easy, since it is essentially a list of all the familiar spooky themes and plots. Listing positives, however, did not come easily and left me - like many - at a loss to explain why stocks have undergone this 3-month sprint.

That is not the case with Jim Paulsen though, as the Chief Investment Strategist at Wells Capital Management easily rattles of reasons we he thinks there's still plenty more room for stocks to go higher.

"This market, as a whole, is starting to suggest that this rally has more legs and sustainability than people might think," Paulsen says in the attached video. "You're seeing more and more underlying characteristics aligning with a real rally."

Such as?

The steady (and not so slow) migration out of Treasuries, Paulsen says. "Finally you're seeing people leave the bond market for the stock market to some extent," he points out, citing the move in the 10-year yield (^TNX) to 1.85% from 1.40% in very short order. That matters, he says because it suggests that "even the bond players are aligning for a little stronger economy, a little greater rally."

He also likes the change of leadership that has not only seen cyclicals like Tech, Materials, and Industrials starting to take the lead but has also "seen the defensives giving way," with things like Staples, Healthcare, and the Dividend Aristocrats fund rolling over.

And finally, Paulsen cites sensitivity - or the lack of it, more specifically - as another reason why this low volume summer melt-up is set to continue beyond the back-to-school sales.

Not only are markets ''less skittish'' but the Vix (^VIX) hasn't budged, the European Conditions Index is at its annual high reflecting none of the fears that tanked it a year ago, and the beta (or volatility) of U.S. stocks compared to Europe is down by one-third.

We know the headwinds by name and have been talking about them for years. Perhaps it's time to give Jim Paulsen and this summer rally the respect it deserves.