When asked his thoughts on the soaring financial markets, Dennis Gartman, the current dean of commodity trading newsletter writers, remarked, “You have to dance while the music is playing.” In other words, when the markets are rallying, you have to participate.
For me, the financial markets more often behave like a game of musical chairs. You have to keep in the game until the music stops, just as Gartman would have us believe. But when the music stops, what happens? Everyone scrambles for a chair, and someone is always left disappointed.
When will the music stop? That’s the $64,000 question. Last week, it was still playing as stocks rallied to new all-time highs … again.
The band has been playing in the current stock market rally since at least February 11, 2016, when stocks hit bottom after a nine-month correction that cost the S&P 500 Index just over 14%. In three days, the latest tune will have lingered for 500 days since the last 5% correction. By the end of the week, we will have the longest period without a 3% correction in history!
Stocks have gained ground for seven months in a row. They have moved higher every week for the last eight weeks. The Trump Rally since the election has been proclaimed the fourth best since 1936!
But just because there has been music in the air for a long time doesn’t mean it has to end soon.
The Bespoke Investment Group reports that in the 14 instances over the last 90 years when the S&P 500 has been up more than 10% at the end of October (it is now up 15.1% YTD) and has gained 1% or more in both September and October, the Index has continued to move higher for the rest of the year.
Not only has the direction of the move been higher, but the extent of the rally for the remainder of the year has been impressive. While history records that the typical year-end rally averages 2.1%, when the described set of circumstances comes to pass, stocks have, on average, gained 5.6% and have been higher 85.7% of the time!
Certainly, there are plenty of reasons for stocks to continue higher. We remain in earnings reporting season, and each day brings another earnings surprise. Most have been positive. In fact, 67.7% of earnings reports have beaten analyst projections, a higher percentage than any quarter this year. And revenues have topped projections over 61% of the time.
Similarly, economic reports continue to shine. While the ISM manufacturing report slipped a bit last week, the corresponding services sector report soared. Since services make up 80% of our economy, this is very favorable.
At the same time, while the jobs report was mixed, the jobless claims report hit its lowest level since 1973. And consumer confidence ended last month at its highest level since 1970!
Still, there are plenty of reasons why the DJ could be about to announce the last dance. Although the Federal Reserve did not vote to increase rates at its meeting last week, the experts say it is virtually certain to do so at its December meeting. Interest rates have been moving lower of late (witness last week’s gains in bonds) but may be about to rebound from their upward-sloping trend lines.
Certainly, the market is overbought. Fewer stocks are participating in the rally. Both the mid-cap and small-cap stock indexes declined last week. And bullish sentiment, often a contrary indicator, made a new six-month high on the AAII Sentiment Survey.
Yes, the music is still playing. And we are still dancing. And while I’m not sure that the party is soon going to end, the band could be ready to take a breather.
All the best,
P.S. Our thoughts and prayers reach out to the families caught up in the horror of this weekend’s church shootings. For them, the music will probably never sound the same again. For the rest of us, although we have heard the sounds of this weekend so often in the past, we must not let such echoes become second nature or merely fade into the background music of our lives.
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