Is Current Market Action Just the Calm Before the Storm?

Current-Market-ActionThere is a genuine serenity when fly fishing. It is unique.

Standing alone in the middle of a river, casting a fly with water gushing around you provides clarity.

Now I know why the stock market hasn’t sold off more on mediocre earnings. It’s the cash.

The run-up to first-quarter earnings season was pronounced, and there is still a tremendous desire for institutional investors to be the buyers in this market.


The stock market’s day of reckoning is coming, but it likely won’t transpire without some sort of shock or catalyst that would give institutional investors pause.

Lots of corporate insiders have been selling shares, but that’s normal. Who wouldn’t consider selling with the stock market at a high? I don’t believe this to be a sign that insiders are jumping ship because earnings expectations are deteriorating.

Even with last week’s drop in orders for durable goods, the stock market ended flat on the news.

Catalysts for correction include a change in the Federal Reserve’s policy, the sovereign debt crisis in Europe (the biggest risk this year), another derivatives trade gone bad, or geopolitical events. I don’t see the catalyst coming from corporations.

The stock market is always so focused on revenues and earnings, but corporate balance sheets continue to improve significantly. While earnings are modest, cash balances are swelling, dividends are increasing, and share buybacks are unabated.

The fundamental health of many large-cap U.S. corporations continues to get better. And this is important for the shocks that are on the horizon.

PepsiCo, Inc. (NYSE/PEP) reported solid first-quarter earnings results, and its cash balance swelled to over $6.7 billion. This was way above the company’s $3.5 billion at the end of the first quarter of 2012. And this was with fewer proceeds from new long-term debt, much higher share repurchases, and increased cash dividends paid, comparatively.

While real economic growth is a tough thing to come by, the story isn’t earnings, it’s that big corporations are getting stronger. Makes me feel a lot better about the current state of things (for investors).

Frankly, I find it difficult to be a buyer in this market. I thought the same at the end of 2012, and then the stock market appreciated another 10%.

The resilience of many blue chips trading at their record highs is astounding. Institutional investors still want to be buyers in this market, even though the groupthink is that the market is due for a correction.

A major pullback is precisely what the stock market needs in order for the technical picture to remain healthy.

Corporations have done the best they can with their earnings.

Revenue growth is an issue, but the stock market is forgiving flat revenues because of very strong balance sheets and reiterated full-year outlooks.

Any big retrenchment requires a catalyst.