Daily Gains Letter

Why I Believe This Market Is Heading Higher—For Now

By for Daily Gains Letter |

Why Stocks Are Heading HigherThis is a stock market that continues to want to move higher despite the lack of any major catalyst.

Sure, the economy is “recovering,” but there are still issues with consumer spending, especially on non-essential durable goods. The headline durable orders reading came in at 0.8% growth in April, above the consensus 1.3% decline but below the revised 3.6% growth in March. For the economy to really confirm the stock market, we need to see growth here. This will also help to drive buying in small-cap stocks that trade with the economy.

The jobs scene is finally beginning to look better since the Great Recession in 2008. Jobs creation came in above 200,000 for the fourth straight month. The unemployment rate held at 6.3%. With the latest batch of jobs numbers, the economy has now recovered all of the 8.7 million jobs lost during the recession. The Federal Reserve will likely refrain from raising interest rates until sometime in mid-2015, but continue to cut its bond buying to zero by year-end.

The fact there’s really a lack of investment alternatives to the stock market is helping. With the yield on the 10-year bond at around 2.5%, I doubt investors or institutions are rushing to buy. Why would you when you can buy higher-yielding dividend paying stocks with capital upside?

The renewal in the global economy is also helping. China hasn’t sunk into the economic abyss as some pundits have been predicting. Its neighbor Japan is finally showing signs of economic growth following decades of doing little. Like the United States, Japan is spending its way to recovery. The country’s first-quarter gross domestic product (GDP) growth expanded at an annualized 6.7%. The massive spending by Prime Minister Shinzo Abe is panning out despite a rise in the sales tax.

While the evidence points to a better place now than five years ago, when the greed on Wall Street helped to drive the sub-prime credit crisis, we need to see sustained growth.

On the charts, the bull stock market is into its fifth year. The S&P 500 and DOW closed higher for the 12th time over the last 15 sessions as of June 6 and, in the process, traded at another record. The bull stock market is heading for the longest run in more than eight decades. The irony is that the current record is the bull market from 1994 to 2000—we all know happened to the stock market in 2000! (Just something to keep at the back of your mind.)

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Along with the rally in the broader stock market, we are also seeing some renewed buying action with the growth element. The small-cap Russell 2000 moved to positive territory this year and is within 3.86% of its record. The index had corrected 10% a few months back.

Technically, investor sentiment has been bullish in 17 of the past 19 sessions for NYSE-listed stocks to June 6. On the NASDAQ stock market, it has been cautious, but it turned bullish in seven of the past nine sessions, based on my technical analysis.

At this point, I suggest continuing to ride the upside moves in the stock market, but also make sure you take some profits off the table.

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