Bull Market Over? These Stock Market Trends Say No

Bull marketWith the Federal Reserve waiting to change the interest rate cycle, the saving grace for the stock market is that the central bank will only do so if the economic and inflationary data is strong enough.

Last year, investor sentiment reacted positively to the potential for changes in monetary policy. If economic growth was improving, an increasing cost of capital is natural.

What Are Earnings Telling Us?

We’ve seen the strength in the U.S. dollar have a negative currency translation effect in financial reporting. And now, with a pending interest rate hike, we’re seeing more debt on corporate balance sheets. With a rising cost of capital increasingly likely, large corporations are beefing up their cash positions.

The stock market has really been directionless this year and corporate earnings are always a welcome addition to daily economic news. While it’s still the early days of the current earnings season, the numbers are modestly positive so far.

Bottom Line Holding Up in the Stock Market

Emblematic of the current state of things is a company like Honeywell International Inc. (HON), whose total first-quarter sales fell five percent, compared to the first quarter last year, due to foreign currency translation as well as a divestiture.

The manufacturing company boosted its 2015 full-year earnings per share guidance slightly. On the stock market, the position is just a few points off an all-time record high.

The stock is currently yielding around two percent with a forward price-to-earnings ratio of approximately 15.

In many of the earnings results for the most recent quarter, we’ve gotten more of the same in terms of companies meeting or beating Wall Street consensus on only one financial metric.

While sales growth is anemic, the bottom line continues to hold up well and is what the stock market continues to pay for.

How Do We Compare to Foreign Economies?

Trading action recently hasn’t been on earnings results but more so on Chinese economic data. It wasn’t too long ago that domestic sentiment wasn’t affected by that developing economy.

This is no longer the case with the catalyst for stock market futures often due to Chinese economic news.

Many of the market’s important averages continue to be in consolidation, which is how stocks have traded since the Federal Reserve’s unprecedented monetary stimulus.

Instead of lasting price corrections, the stock market is experiencing sideways trading action. This is probably a trend that won’t change until the U.S. economy experiences its next technical recession.

The Good News

If some speculative fervor has been lessened this year, it is perhaps a good thing for the market overall. (See “Sherwin-Williams, Alliance Data: Two Institutional Investor Favorites.”)

The fact that transportation stocks are in consolidation and no longer “leading” the broader market is no big deal. It signals the maturing of the secular bull market. Many of these companies reported very good financial results in the most recent quarter.

The Russell 2000 Index and the NASDAQ Biotechnology Index are very close to pushing new record highs.

The stock market isn’t likely to experience a material breakdown without these important benchmarks leading the way.