There’s Real Strength in this Stock
Market—the Trading Action Says So

How the trading action is reflecting the strength in this stock market. So here we are—stuck in an environment of uncertainty regarding the debt crisis in Europe and declining expectations at home. The S&P 500 Index is back up to 1,200 and seemingly, those trading the index are benefitting from all the volatility. Index options traders must be relishing the current trading action in stocks and no doubt this choppiness is here to stay.

One thing I’ve noticed is that a lot of higher-dividend-paying stocks have been outperforming the rest of the stock market and holding up very well all things considered. It’s pretty clear that institutional (and individual) investors are craving dividend yield in a market with little expectation of capital gains. In fact, this market is more about preservation of capital, and dividends are the only way to earn a return on investment that beats the rate of inflation. Treasuries and cash certainly don’t pay anything and corporate bonds are still being shunned.

This is a market where investors don’t need to be in a rush to do anything. The stock market just experienced some very negative trading action—but it climbed back up to return to what I think is its equilibrium, which is 1,200 on the S&P. It’s actually quite impressive as far as I’m concerned, and I reiterate my view that the stock market would be quite a bit higher if sovereign debt and the prospect of a default in Greece weren’t issues. The fact that share prices clawed higher as the Street continued to reduce earnings expectations for the fourth quarter and first quarter next year is quite an accomplishment.

This is a stock market that wants to go higher and investors are waiting on the sidelines for a catalyst to jump in. If we could get more certainty in the global marketplace with the sovereign debt problems in Europe, I think we’d get a 10% jump in the main stock market averages, finishing off the year with a nice little rally. A lot of the earnings I’ve seen so far have been solid and, while corporations can’t keep up this performance forever without decent revenue growth, most corporate visibility I’ve read recently is saying that business is getting better.

The S&P 500 Index has been bouncing around, trading range-bound since August, and it’s almost entirely due to the situation with sovereign debt. Trading volume has been consistent, as the Index found support at 1,100 and resistance at 1,220. This trading action is symbolic of a general stock market correction and is very similar to the correction experienced from April to September last year.

If there is more progress in Europe, then the probability of a stock market rally improves significantly, especially before year-end. I hate to say it, but certainty in global capital markets is now up to the politicians in Europe. Let’s hope they get it right. The marketplace is getting very tired of this issue.