Stock Market: What Could Jump
Start a New Short-term Trend

If the U.S. stock market is going to advance in any meaningful way, then it’s going to have to do so based on domestic economic news, to the exclusion of what’s happening in Europe and China. The eurozone debt crisis is a very real risk to the global economy and so is China’s declining economic news, but, at the end of the day, the only way the U.S. stock market is going to go up is because of domestic fundamentals.

The stock market’s been looking for a reason to go up and, while some economic news lately reveals a positive trend, the numbers still reveal much lower-than-usual levels of business activity. It’s going to take a number of quarters yet for the real estate market and employment to balance themselves out. But even so, any uptick in economic news will move share prices markedly higher—institutional investors are chomping at the bit. (See If Europe’s Fixed, Stocks Should Resume Their Upward Trend)

Trading action now is also accentuated by relatively low volume, which always occurs around the end of the year. There’s also a fair amount of portfolio posturing that takes place among institutional investors and this has a tendency to skew share prices. You can expect big price swings over the next few weeks.

A key point in my mind is 1,200 on the S&P 500 Index. If this main stock market index can keep above this level, then I would say it is holding up quite well all things considered. The sentiment is there for rising share prices and what this market really needs is more economic news confirming an uptick in business activity. With large corporations still saying that business is pretty good, my bet is that the fourth quarter will reveal quite an improvement in gross domestic product (GDP). This doesn’t mean that the trend won’t change next year; only that some pent-up austerity has been let out in this latest quarter.

In spite of the frustration stock market investors must be feeling, it’s only been two and a half years since the low set in March 2009. What transpired late in 2008 and early 2009 can only be described as a complete and total breakdown in capital markets. In my view, we are extremely lucky to be where we are considering the very poor health of financial institutions at the time. Economic news since then hasn’t been very rosy, but the shock of the subprime mortgage meltdown was so severe that I’m thankful the economy isn’t in a full-blown depression at this time. The stock market might still be experiencing a gigantic “rolling over” in its long-term trend, but it did the same thing from the mid-60s to early 80s. This was a difficult period for equities and the performance of the S&P 500 Index over the last 11 years has been quite similar.

Like I say, any upward price momentum in the stock market must have more positive economic news to be sustainable. Domestic investors have been so focused on Europe and China lately that their attention has left the U.S. stock market fairly valued and that’s the great opportunity we have before us right now. Because stocks aren’t overpriced, any positive economic news will translate into positive trading action in the near term.