The stock market, as measured by the S&P 500 Index, broke 1,400 quite meaningfully, but the market’s been due for a pullback and I view recent stock market action as healthy. Going forward, the trading direction will obviously be based on corporate earnings, which I estimate will be uneven, but generally positive.
Most everything on the stock market pulled back recently, including oil and precious metal stocks. As a group, precious metal stocks have been particularly weak over the last couple of months, largely because of spot prices. Gold and silver should still be a component of a balanced stock market portfolio, especially considering the state of monetary policy today. And even though the price of gasoline is up and oil prices are above $100.00 a barrel, a lot of oil stocks dropped significantly since early March. It’s as if institutional investors just walked away from the sector, betting on a weaker economy. It will take a major upward move in spot prices to change the near-term outlook for commodity-related stocks.
A key indicator for me remains the Dow Jones Transportation Index, which broke down significantly over the last few days. This index, which was holding up very well, has now given up all of its gains produced since the beginning of the year and I’d like to see it turn around soon. Any further breakdown below 4,850 on this index would definitely be bearish.
But, the trading action in stocks is now all about earnings reports and corporate visibility. If the news is generally good, the stock market will still likely retreat. What the market needs in order to advance materially is out performance in the earnings department. Alcoa, Inc. (NYSE/AA) definitely surprised the Street with both its earnings and revenue growth. Two big banks report their earnings at the end of the week and this news will be important to investor sentiment.
The stock market moved pretty much in lockstep with the verbal policy of the Federal Reserve this year; with the central bank being the market’s biggest cheerleader. Earnings weren’t the catalyst. I do wonder if the old adage, “Sell in May and go away,” will apply once again. (See Current Stock Rally Has a Little More Legs, But a Correction’s Imminent.) While the outlook for first-quarter earnings is good, I just can’t get bullish on the stock market at this time. The S&P 500 Index is currently trading around the same level it was back in April of 1999 and this highlights the extreme volatility the stock market’s experienced since then. On balance, I’d say the stock market today is fairly valued considering earnings. Going forward, dividends are likely to be a greater part of total stock market returns in the age of austerity.