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Stock market rally lacks a certain style

Michael Santoli
Michael Santoli

For the stock market, simply climbing to an all-time high isn’t impressive enough for some critics. Style points matter too – and right now the arbiters of style find the look of this rally to be just a bit off.

First, though, the positive parts: When the S&P 500 (^GSPC) clicked to its record-high close set earlier this week, it was accompanied by fresh highs in financial and technology stocks. This was the hallmark of bull markets past, the money dealers and computing names leading the way. Yet that’s about where the applause ends and the nitpicking starts.

Several groupings of stocks deemed significant for the underlying health of a market move are conspicuously lagging. Let’s take the complaints in turn:

-Small-cap stocks have held in ok, but the benchmark Russell 2000 index (^RUT) has not joined the big-cap S&P 500 at a new high. While it’s only a bit more than 1% from its peak set a month ago, its slippage versus the large-caps doesn’t speak to swelling risk appetites, and is not the ideal setup for further gains in the broad market.

-Related to the small-cap quibble, the running tally of rising versus falling stocks – known as the advance-decline line – has also failed to match the S&P 500’s record run step for step. Again, not a fatal flaw at all, but also not what the bulls would prefer to see in the short term.

-Perhaps the most conspicuous ugly patch in this market is the transportation stocks. The weakness in the Dow Jones Transports, traded as the iShares Transportation Average ETF (IYT), has been dramatic in recent months. Year to date, the Transports are down more than 7%, and trail the headline Dow Jones Industrial Average by more than 10 percentage points. Even if we’re not all so-called “Dow Theorists,” who believe in the ancient tenets of chart study that require the Transports to “confirm” a broad market new high, the weakness here must be considered at least a nagging negative.

For a time, the underperformance of this sector could be chalked up to struggling railroad stocks, thwarted by the downturn in crude-oil transport in the energy-price crash. Yet yesterday it was the airline stocks that tanked, U.S. Global Jets ETF (JETS) being crunched by more than 5% on concerns over increased capacity. The retreat was especially dramatic no doubt because owning the airlines have been a very popular trade the past couple of years, as many believed the destructive competition of decades past had given way to a more rational, profitable industry. Maybe it has, but yesterday’s sudden loss of faith at least showed that these stocks had been “overbooked,” so to speak, and some weaker owners got bumped.

Put all together, this ambiguous picture of resilient indexes with weaknesses beneath tells us not very much about which way things will break. It’s the very essence of the range-trapped market we’ve had almost all year. There is one area that might be profiting from nasty transportation problems in a surprising way, though.

The California port shutdown of a few months ago has hampered retailers’ ability to stock shelves with fresh merchandise made in Asia.Yet the off-price retail chains seem to be benefiting from this snarl. Delayed, out-of-season clothing and other goods that mainline retailers now can’t use are being sold at deep discount to the off-price chains. TJX Cos. (TJX), parent of TJ Maxx and Marshall’s, this week noted this as a positive contributor to its quarterly results. And after the close today, we’ll hear from TJX competitor Ross Stores Inc. (ROST), which similarly carries branded clothing and housewares at discount prices.

Ross is considered a smart operator, and in the past three quarters has beaten analyst earnings forecasts by at least 5%. Tonight, the Street expects Ross to report profits of $1.28 a share, up more than 11% from a year earlier. Ross stock has been a stellar performer, rising 48% in the past year, though it now sits 6% off its March high. Ross can close the day with a bit of a check-up on the mid-market shopper and investors’ appetite for domestic consumer plays.