What Was Behind the Stock Market’s Massive Breakout?

What Was Behind the Stock Market’s Massive BreakoutSomething big happened at the beginning of the year—Wall Street gave up on Washington.

I’ve been trying to figure out how this incredible stock market action started at the beginning of the year. Things were trending fairly normally, and then institutional investors just started buying—blue chips first, a little break in February, then blue chips again, with a broadening out into the NASDAQ.

But there wasn’t any big catalyst that suddenly galvanized a change in investor sentiment. There wasn’t anything new from the Federal Reserve, and fourth-quarter earnings season hadn’t started yet.

But the Dow Jones Transportation Average and blue chips just took off.

It’s as if big investors just threw up their hands and said, “Forget policymakers; we’re going ahead anyway.”

The Dow Jones Transportation Average continues to be one of the key indices for the stock market. This is nothing new. The stock market run-up was led by this index and followed by blue chips.

Dow Jones Transportation Average Chart

Chart courtesy of www.StockCharts.com

The action in this index now is similar to the break it took in the last half of March. The index didn’t re-accelerate until the beginning of May.

Both transportation stocks and blue chips are definitely due for an extended break after this big run-up. It could very well last until second-quarter earnings season begins, or right into the fourth quarter.

But while the stock market needs to experience a retrenchment, there is still buying on the part of institutional investors. On a number of occasions, when the stock market opened down recently (either technically or on bad news), the main indices fought their way higher, often closing flat.

Trading volume, especially among blue chips, has been on the decline. If new cash inflows to the stock market have now been invested, it’s evident in declining volume. (See “The Great Big Gamble: Can a Little Earnings Growth Turn into a Lot?”)

With blue chips now overbought, there isn’t a lot of new action to take, especially if you’re a non-active investor.

It’s now up to corporations to show genuine business growth to justify the recent run-up. This is going to be a tall order, considering the mixed economic news recently. The financial health of most blue chips continues to be excellent, but top-line growth has proven to be genuinely difficult—especially for multinationals.

It is possible that the broader stock market can hold together if second-quarter earnings season turns out to be flat. There remains considerable willingness on the part of big investors to be buyers of equities.

Great uncertainty remains throughout the world: the sovereign debt crisis in Europe hasn’t gone away, there are always geopolitical events, the marketplace still has no idea how exposed it is to derivatives, and quantitative easing is on the chopping block.

In spite of all the uncertainties, institutional investors decided to buy stocks anyway.

A well-deserved break is in the cards. This is now the historically slow time of the year for stocks.