Why it's not just Federal Reserve funny money fueling this rally: trader
By Keith Bliss of Cuttone & Co.
The market has finally broken out …
The price action since June 27 has been nothing short of breathtaking. The Dow Industrials (^DJI) and S&P 500 (^GSPC) are both up close to 9% since that time, while the Russell 2000 (^RUT) has enjoyed a run of 10.9% higher.
Aside from the absolute increase in value of the major indexes, there are supporting internal factors that lend credence to the notion that we are in a breakout. Indeed, market breadth indicators, metrics indicating money flows back into growth sectors, and the VIX sinking below the lower channel level of $13 are all factors that support the market breakout call.
Most importantly, small caps have been leading the charge, and the reverse head and shoulders in the Russell 2000 suggests that we could see that index not only eclipse its old all-time high of 1296 but also maybe even approach 1400.
But why—and why now?
Second quarter earnings season is projected to be poor. There are still concerns about the global economy and there are klaxon alarms over valuations being sounded by a number of pros (see Larry Fink’s comments yesterday).
In fact, it wasn’t that long ago that the Fed was worried about the US economy, and the Brexit vote on June 23 was supposed to crater markets like we had never seen before. Yet, here we sit, able to set new records recently in the Dow and the S&P 500.
Given the momentum that is now in the market, it would not be surprising to see the S&P approach 2200 soon or for the Dow to get to (dare I write it?) 20,000. This prediction will certainly be supported if we see the Nasdaq Composite and the Russell 2000 eclipse their respective all-time highs in the coming days.
Why fundamentals are starting to matter
It would be easy to say that this rally is all central bank induced. But, it appears to be more than that. Sure, we have to admit that the extraordinarily accommodating central banks have contributed to risk asset inflation (and a rush to safe assets at times) by essentially placing a stop underneath any investment.
Investors, however, seem to also be placing a bet that the fundamentals in the economy – and, therefore, by extension with the publicly listed companies – will support the higher valuations that we now see. If true, this market will have a different look and feel than we have seen in the last few years.
It will be a market that is borne from true valuations instead of phony ones. We will get a feel for investors’ appetites to accept expanding multiples and “rich” valuations in the coming days as more earnings roll out. As noted, this season is not expected to be good, and if the market stays at healthy levels, it’s a sure sign that this is a future bet on fundamentals.
