Market Insights, Feb. 22, 2015

Market Closes at New Highs – Will There Be a Melt Up?

The S&P 500 Index closed on Friday at a new all-time high of 2,110.30, up 0.7% on the week. The Nasdaq Composite was the strongest of the major stock market averages with a gain of 1.27%, riding the Apple (AAPL) wave to new bull market highs, merely 2% under the all-time high of 5,049 set on March 10th 2000.

The week was indeed choppy until Greece got a 4 month reprieve from the European Economic ministers, which triggered a robust closing rally on Friday that took the major averages to new highs. We are still bullish on the stock market for the first half of 2015 through the November elections, but see an erratic path to our 2,250 – 2,300 target zone.

The U.S. stock market was aided by the strength of economic numbers coming out of France and Germany, which mitigate the risk of worldwide deflation, which spooked some equity market participants. The European stock markets have been outperforming the U.S. markets but we are still awash with liquidity, thanks to relatively high 10 year U.S. Treasury yields currently at 2.13%. This liquidity, along with the steady growth in corporate earning ex energy stocks, should give the stock market added fuel for a move to higher highs in 2015.

With the stock market overbought and attracting bullish headlines, expect some minor pullbacks, but view them as buying opportunities in bullish Chaikin Power Gauge rated stocks in strong sectors and industry groups.

The ability of the market to shake off negative economic reports in the retail and home building sectors, sharply reduced earnings estimates for 2015 for the S&P 500 Index, coupled with lower corporate guidance, is an example of the stock market climbing a wall of worry.

Of course, earnings drive stock prices, but skeptical investors from individuals to institutions still have substantial cash on the sidelines and once again are underperforming the broad market averages. Liquidity and the performance game can trump poor economic reports, but not forever. The one bright spot is perhaps the most important. The employment picture continues to improve and hourly wages will soon begin to rise. Wal-Mart’s (WMT) announcement on Friday of wage hikes for hourly workers will put pressure on other retailers to follow suit.

What is the impact of an improving job market and rising wages?

An improving job market translates to higher consumer confidence and a willingness to spend. While that has so far manifested itself in autos, auto parts, home improvement sales and restaurant traffic, it will ultimately have a positive impact on the home building market and bigger ticket items. This is all good for an expanding U.S. economy. The sharply lower price of crude oil will also have a positive effect on consumers and industrial and materials companies that use petroleum products as feeder stock for manufacturing.

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