U.S. equities finished higher again on Wednesday, capping the ninth-straight gain for large-cap stocks and the 14th gain in 16 sessions for the longest winning streak since 2013.
The stock market’s obsession with monetary morphine has reached a new high. The result has been an epic 9%-plus surge off of the late June Brexit low — all merely on the hopes and nonspecific hints of more cheap money stimulus. All other catalysts — from weak corporate earnings to eye-watering stock valuations and the fact that the market rebound has in fact made fresh central bank easing increasingly unlikely — doesn’t seem to matter.
In the end, the Dow Jones Industrial Average gained 0.2%, the S&P 500 Index added 0.4%, the Nasdaq Composite wafted up 1.1% and the Russell 2000 ended 0.8% higher. Treasury bonds weakened, the dollar was mixed, gold lost 1% and crude oil gained 0.2% to reverse early weakness.
Earnings remained in focus, with Microsoft Corporation (NASDAQ:MSFT) up 5.3% on a massaged non-GAAP earnings-per-share beat and confident forward guidance. Morgan Stanley (NYSE:MS) gained 2.1% to rise to levels not seen since January, despite a modest year-over-year decline in total revenue, thanks to a strong performance by its fixed income business.
After the close, Intel Corporation (NASDAQ:INTC) dropped 2.5% in volatile trading after reporting a massaged non-GAAP earnings beat justified by restructuring charges (the company laid off 12,000 in April). Investors looked through this, worried by falling profit margins and the worst GAAP earnings performance since 2009.
Elsewhere, American Express Company (NYSE:AXP), eBay Inc (NASDAQ:EBAY), and Qualcomm, Inc. (NASDAQ:QCOM) all reported top- and bottom-line beats.
As a result, FactSet notes that the current blended S&P 500 earnings growth rate for Q2 has improved to a -4.6% loss from a -5.2% loss on Tuesday and -5.5% at the end of the quarter. This is all pretty typical. And, in the end, profits are expected to fall for the fifth quarter in a row.
This is just one of many negative headwinds stocks are ignoring right now.
As the market’s climbed to new records, it’s been doing it on the back of fewer and fewer stocks. In fact, there were more stocks rising when stocks were topping back in April than there are now. Very odd.
There’s more. Wall Street pros are nervous, valuations are high, fund managers are holding large cash reserves, and U.S. economic data suggests inflation is coming back to life (which will make withholding Federal Reserve rate hikes increasingly difficult).
Jason Goepfert at SentimenTrader notes that his own measure of “Dumb Money” vs. “Smart Money” sentiment — which compares indicators such as commercial hedging positions in equity index futures to small speculators in equity futures to see how the big boys are feeling compared to the small fish. Through Tuesday, the dumb money is 76% confident in the rally while the smart money’s confidence is at only 18%.
Historically, gaps as large as this have been a bad sign for stocks going forward: Every time in the last 20 years, any further short-term stock market gains were erased during the subsequent pullback.
What could be the catalyst for the eventual reversal? Renewed weakness in crude oil.
Energy prices look vulnerable to a breakdown here as U.S. production ramps up and overseas supply disruptions fade amid bloated inventories.
These disruptions included everything from terrorist attacks in Nigeria to ongoing strike in Libya to wildfires in Canada. But these have faded, along with other demand side dynamics such as stockpiling in China and ramped up refinery output. The result has been a turn higher in the backlog of refined gasoline, which started the summer driving season well above levels seen since 2012.
A dramatic comedown in energy prices would rattle oil and gas stocks — the catalyst for the rally out the February low — and rattle investors with the return of a negative catalyst they’ve not dealt with for months amid all the chatter of an OPEC-Russia supply ceiling deal (remember that?) which never came to fruition.
Turning to the central banks, the Bank of England recently decided to hold off on any new stimulus efforts following the Brexit vote and has even admitted the vote to leave the European Union hasn’t adversely affected the economy.
The European Central Bank is expected to remain on hold. And amid ongoing labor market tightening and evidence of nascent inflationary pressures building, odds of a Federal Reserve rate hike are rising heading into their policy announcement next week.
All eyes are on the Bank of Japan’s policy meeting next week as the singular theme of the post-Brexit rebound has been hints and hopes of a “helicopter money” effort out of Tokyo combining aggressive fiscal stimulus with the monetization of debt.
The latest reports seem to pour cold water on that idea, however. Moreover, the BoJ is running out of government bonds to buy.
A surprise “no change” announcement by the BoJ would shatter a lot of bullish optimism on Wall Street.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
