“…the negative case is always more compelling, articulate, and reasonable because it looks at the present, the obvious and that which is quantifiable. The market meanwhile looks ahead and is focused on the future but does not necessarily share its conclusions with us.” —Birinyi Associates

• Markets can correct in time or price, and since early May it has done a little of both. The two-and-half month consolidation has allowed equities to digest some of the strong gains seen off the March lows, which is to be expected after a 40% rally.
• During this sideways process, investor expectations have retreated from elevated levels, which we view as a plus, given the bar was getting raised to a point where even good news was losing its positive impact.
• This reduction in investor enthusiasm was evident in the most recent sentiment poll from the American Association of Individual investors (AAII), which showed the percentage of bullish investors has contracted to just 28.7% (this survey is typically viewed as a contrarian indicator).

Figure 1: Investors Remain Skeptical Of Equities

Sources: SunTrust Robinson Humphrey, Bloomberg, AAII

• With expectations lowered, investors have reacted favorably to tentative signs of improvement from Corporate America. Although it is still too early to draw strong conclusions, the second-quarter earnings reporting season is off to a reasonably good start. Goldman Sachs and JP Morgan easily surpassed earning estimates, and Intel indicated that clients are showing increased confidence in a second-half recovery. Also, credit-card issuers Capital One Financial Corp and American Express released better-than-expected June delinquency and charge-off data.
• This encouraging news flow has contributed to a 6 percentage point increase in the S&P 500 in just the past three trading days, which is strongest three-day advance since the rally began in March.
• The recent gains in the stock market have been broad based; in fact, both Monday and Wednesday saw over 90% of volume flow into advancing issues on the NYSE, which we view as a positive and a sign of underlying strength. That being said, the trading range in the S&P 500 remains in effect, with key supports around 870/880; conversely, 956 on the upside remains a formidable resistance barrier (Figure 2).

Figure 2: Recent Uptick In Stocks Supported By Strong Breadth Readings

Sources: SunTrust Robinson Humphrey, Thomson One

Previous Page

1  |  2  |  3  |  4

Next Page