The great market trifecta ended Thursday with slight losses that continued Friday.
On Wednesday, the Dow Jones Industrial Average, Standard & Poor’s 500 index, and Nasdaq Composite index hit record highs for the fifth consecutive day—the first time that’s happened since 1992.
But on Thursday, only the Dow continued its streak. The S&P and Nasdaq were off by less than 1/10th of one percent. (Only the Nasdaq rose Friday.) All three of them, and the Russell 2000 small-cap index, are still near all-time closing highs.
The complacency I wrote about last week has abated a bit as the CBOE S&P 500 Volatility Index—the VIX—rose about 10% from last Friday’s ten-year low. But it still is below 12. And three leading indicators of institutional sentiment—Market Vane, the Consensus Bullish Sentiment index, and Investors Intelligence—are all near their highest readings for this bull market.
So, it’s a good time to sell, right?
Well, not yet.
Veteran technical analyst Ron Meisels, whom I’ve interviewed a few times, warns that new 52-week highs and upside volume are not expanding, a sign buyers may be getting tired. But he thinks “this advance has a broad base of support” and the trend is still bullish. The S&P is up 9% since the election and a whopping 30% since last February’s lows. Remember those days when oil prices were plunging and the world was ending?
In her Congressional testimony this week, Federal Reserve Chair Janet Yellen said optimism about “shifts in fiscal policy that will stimulate growth and perhaps raise earnings” have driven share prices higher.
Translation: Wall Street expects the Trump Administration to deliver on tax reform, tax cuts, looser regulation and maybe even some infrastructure spending. That’s the rationale behind the so-called “Trump rally.”
And some consumer and especially business confidence indexes have tracked higher since the election, suggesting the economy is picking up.
Second, the earnings recession is over. Thus far, S&P 500 companies have reported 5% earnings growth for the fourth quarter, much better than expected—and the first time the S&P has seen year-over-year earnings growth since the first quarter of 2016. In conference calls, many CEOs specifically cited tax policy and less regulation as reasons for optimism for 2017.
And speaking of 2017, analysts currently value the S&P at 17.3x 2017’s estimated earnings, according to FactSet Research. That’s higher than the ten-year average of 14.4x, but around where it’s been for a while. Signs of euphoria have appeared only recently.
That means we could soon see a short-term correction. But especially now, during the market’s strongest season, the fundamentals remain positive, so the bull market should continue for a while.