How Many Stock Market Top Boxes Have Been Checked?

After posting another new high last week, stocks were taking a breather during Monday’s session. The primary catalyst came out of China. From Reuters:

China’s exports unexpectedly tumbled in February, falling 18.1 percent from a year earlier and swinging the trade balance into deficit. The data underscored recent concerns about the outlook for China’s economy, even though the Lunar New Year holidays were blamed for the slide.

Bullish Case For Stocks: Improving or Deteriorating?

Bear markets are typically associated with (a) economic contraction and (b) deterioration in corporate earnings. When (a) and (b) begin to occur, or are anticipated by investors, their behavior changes in both the stock and bond markets. The Wall Street Journal published the useful “what to watch for” checklist from Strategas Research Partners Monday.

The table above tells us the stock market bears probably have some work to do. In fact, instead of showing weakness, the broad NYSE Composite stock index recently broke out in a manner that aligns with economic confidence, rather than economic fear. This week’s video reviews the NYSE’s break above previous resistance, along with concerns about all-time-highs.

Earnings Drive Stock Prices

From a common sense perspective, a company growing their bottom line is probably a better investment candidate than one seeing profits decline. One of the boxes checked in the table above is weakening upwards earnings revisions. How concerned should we be? From Yahoo:

“We believe that the US equity markets for 2014 will be up perhaps 7% or 8%,” says Morganlander, who thinks the economy will show better-than-expected growth this year. “Our GDP forecast is for over 3% for 2014. And, what really drives the stock market – and, it’s about 90% correlated – is earnings. We believe S&P earnings for 2014 will be up roughly 7% to 8% and that ties into our price target.” According to Morganlander, the economy’s growth is based on more credit, capital investment, and job creation. “We hit a pothole over the last several months,” says Morganlander, “but over the next several months, as we start to warm up and the great ‘Ice Age’ starts to melt, we’re going to start to better employment numbers and better employment data coming out.”

Investment Implications – Bulls Still In Control

When the S&P 500 closed above the early 2014 high of 1,848, it told us something positive about investors’ expectations for future earnings and economic growth. The positive slopes of trendlines A, B, and C below paint a similar bullish picture about investor expectations. Even when the economy is clicking on all cylinders, the stock market never goes straight up, which is why it is prudent to know key levels that may act as support.

Until the economic and technical evidence shifts, we will continue to hold U.S. stocks (SPY) and technology stocks (QQQ).