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December 14, 2015, 10:18 P.M. ET - From Barron's Daily Online
Bulls Beat Back Bears as Dow Gains 100 Points
By Ben Levisohn
Bulls managed to beat back the bears–for one day at least–as stocks bounced back a bit from last week’s selloff.
The S&P 500 rose 0.5% to 2,021.94, after falling as much as 0.9% earlier today. The Dow Jones Industrial Average gained 103.29 points, or 0.6%, to 17,368.50, and the Nasdaq Composite advanced 0.4% to 4,952.23. The small-cap Russell 2000, however, sat out the rebound, and fell 0.7% to 1,115.86.
RBC’s Robert Sluymer writes that a short-term bounce could be developing ahead of the Federal Reserve’s rate-hike decision:
Short-term momentum indicators, tracking 2-4 week shifts, are moving toward oversold territory suggesting a trading low should develop in the coming days/week coincident with option expiry and this week’s Fed announcement. While it is early to definitively state short-term lows are in place, silver linings include major market indexes beginning to bounce from next support levels, notably the S&P from 1995 and the Dow Industrials from its 100-dma.
Wells Capital Management’s James Paulsen argues that no matter what the Fed does, the current bull market is “no spring chicken.” He explains:
The ultimate capacity of any bull market is of course a complicated calculation dependent on an unspecified and not readily accepted set of factors. For example, how much room is left for improvement in investor sentiment? Are most investors already fully invested in stocks or are they sitting on considerable cash balances? Are valuations reasonable or are they nearing historic highs? How competitive are alternative investment returns? Do policy officials still have room to implement supportive accommodative policies? How young is the corporate earnings cycle? Are company balance sheets strong? Does the economy still have room for improvement or are late cycle cost-push pressures evident?
Capacity utilization is a concept long used when judging the economic cycle. Concepts like the factory utilization rate, the labor unemployment rate and the economy’s output gap help in accessing the age of an economic recovery. In a similar fashion, this note calculates and examines a capacity utilization rate for the U.S. stock market. While no single indicator is ever definitive, based on its utilization rate, the contemporary bull market is no spring chicken…
Valuations may not be record setting, but they are fairly high. Falling bond yields, a primary catalyst for the bull market during the last 35 years is all but exhausted. Because the economy is now near full employment, additional improvements in the pace of economic growth will likely come only with broader cost-push pressures, higher inflation, increases in bond yields and greater pressure on profit margins and P/E valuations. Finally, the corporate profit recovery is well past its best for this cycle. Profit margins have no room to rise further and emerging pressures may erode margins thereby largely offsetting any material improvements in sales performance…
At best, the major factors underlying the stock market will simply maintain their respective lofty hospitable levels. Less optimistically, some of the foundations for the current bull market may begin to weaken. Consequently, investors should adopt a more conservative outlook (if not yet bearish) for a stock market exhibiting the highest capacity utilization rate of the post-war era.
Don’t you wish he’d just say sell?