U.S. Stock Market Rally Continues Amid Negative July 2014 Global Headline Risk

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The next leg of the rally may have just begun:

The U.S. stock market continues to be the ‘most hated rally’ in history.  Long-term holders have been rewarded for their patience while short-term buyers are rewarded for purchasing on dips. Even global headlines that were extremely negative have not dampened bullish sentiment.  Here are 3 recent events that didn’t stop the buying momentum:

  1. The issues in the Ukraine didn’t stop buyers from taking new positions.
  2. The Portugal banking crisis was short-lived -although it may return.
  3. Equities rallied after the start of the Israeli ground operations.

In short, global headline risk hasn’t changed bullish sentiment and a true rally begins to have pressure when retail investors get more interested in buying stocks again.  There is still a lot of cash on the sidelines so hedge funds and institutional buyers need to put money to work.

Janet Yellen signaled to investors a word of caution regarding biotech and social media stocks but perhaps she wasn’t considering expected profits for companies like Facebook or was looking strictly at Twitter.  The social media sector boom should continue for some years to come because online profitability is no longer limited to Google.  The economy remains in slow growth mode and reduced QE hasn’t caused bulls to throw in the towel.

Technical Analysis and Economic Fundamentals:

The small cap sector has been rangebound for the last few weeks and may be a medium-term buying opportunity while it’s at the lower end of its recent price range.  Concerns about small caps would be warranted if Facebook, Apple, Google and other momentum stocks were underperforming the market.  Most moving averages are positively sloped and short-term moving averages have flattened since Thursday’s sharp decline and rise in volatility.  The S&P 500 is up 7 percent for the year while the Nasdaq is up nearly 10 percent and July has been a positive month for most stocks even with negative headline risk permeating the news.

Equity buyers are still in control and follow-through this week by the S&P 500 or tech/bank earnings could build more momentum even as bonds become more attractive.  When bonds and stocks are going up, this indicates more money coming into U.S. markets and could be considered the sweet spot of the ‘hated rally’.  Increased money flow and confidence central banks will add liquidity is a strong reason to maintain a bullish posture as the ‘Yellen-put’ continues to lift asset attractiveness. If small caps can find support and companies show expanded profits this week, expect the Nasdaq to hit new highs.  Watch mid caps carefully to evaluate whether continued buying at distribution entry points will continue to work for investors.  Dow 18,000 is still possible this year.

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