Stock Market: Where’s It Going Next? The One Indicator I’m Watching

Stock MarketIf it weren’t for the NASDAQ, this stock market would be flat once again. The resilience of technology and biotechnology stocks is a positive signal for equities.

The Dow Jones Industrials, S&P 500 Index, and Wilshire 5000 Total Market Index‎ are basically flat year to date.

Earnings season results continue to come in lackluster. But I would say that sentiment continues to be buoyed by Greece’s restructuring of its debt obligations.

While comparable sales and earnings growth for the second quarter of 2015 are nothing to write home about, because expectations are so low, the modest results aren’t being met with selling.

Stock Market Earnings Reveal Two Very Different Economies

What’s shaping this earnings season is the divide between technology companies and what I usually refer to as “old economy” companies.

So, while railroad and trucking company (old economy) results are flat, large brand-name technology firms have pleased the Street with their numbers so far.

Earnings are holding up across a spectrum of industries, but sales aren’t great and currency translation is putting comparable results into negative territory.

Is Sentiment Strong Enough to Keep the Bull Market Alive?

Is sentiment strong enough? I believe it is as long as there aren’t any “shocks” to the system that could derail certainty. This would be a development outside the domestic equity market like something related to Greece’s sovereign debt, a geopolitical event, or a big derivatives trade gone wrong.

This is a market that is still in a very low interest rate environment without much competition for stocks.

Investors aren’t looking for much in a market that’s already gone up. If we get more dividends, continued share repurchases with financial results that at least meet expectations, I do believe it’s enough for this market not to sell off.

Accordingly, while NASDAQ leadership is a positive indicator, we may get continued consolidation in the main market indices right into the fourth quarter. Then all bets are off.

Because this has been a unique time with regards to extreme monetary policy, this stock can actually rally on the first couple of interest rate hikes. Sentiment was like this last year with equities rallying on Fed speak/expectations regarding rising rates.

And there’s more certainty in the marketplace from the Federal Reserve. With the interest rate cycle about to change, equity market investors are likely to bid the central bank’s expectation for stronger economic activity.

I’m seeing a lot of brand-name companies confirming their existing 2015 full-year outlooks. This is a positive development, but not a surprising one. (See “Stock Market: Watch Earnings, the Only Metric That Matters to the Bull Market.”)

Corporations have a tendency to be conservative with their yearly forecasts. It makes it easier to beat the Street when the time comes. And it makes business conditions appear better than they actually are, which is good for current management.

Also holding up are forecasts for 2016, both from corporations themselves and Wall Street sales and earnings outlooks. This, in my view, represents the most important data of all. Because even in the face of an interest rate hike in the fourth quarter, investors will bid 2016’s economic potential ahead of time.