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 Among the good signs, the run-up has come with strong volume and is
supported by almost every company in the index. Furthermore, worries
have eased about some threats to the bulls' case for stocks, such as
an aggressive U.S. monetary policy and spreading weakness from China
and other developing markets.
The missing piece remains corporate profits, which will have to come
in better than the dire results projected for the first quarter of
2016.
BREADTH
It is good news for bulls that the current rally is broad-based,
with only a dozen companies continuing to fall since the index
bottomed in February.
The most recent rally of this strength started in late August and
stumbled in November, when it became apparent that only a handful of
well-known companies - Microsoft , Alphabet, Apple, Exxon and
Amazon.com - were propelling much of the action. During that rally,
80 of the index components continued to fall.
The average S&P stock is up 15.3 percent since February 11, when the
rout which started 2016 ended. Over the same period the S&P, which
is market-cap weighted - meaning the bigger companies have the
biggest impact on returns - is up 12.8 percent.
"To see the average stock outpacing the market is a healthy sign,"
said Jack Ablin, chief investment officer at BMO Private Bank in
Chicago, who noted that rallies usually end with fewer companies
participating.
NEW HIGHS, STRONG VOLUME
By the market close on Thursday, more than 700 New York Stock
Exchange stocks had hit a 52-week high this week, on track for the
highest reading in at least a year.
Furthermore, NYSE stocks that have moved higher have had greater
volume behind them, with the 50-day average volume on rising stocks
hitting its highest since October 2011, which still ranks as the
best month for the S&P since 1991.
PRICEY, BUT NOT CRAZY
Company shares are priced high relative to their earnings, but they
still have room to get more expensive, based on past rallies.
The S&P sells at 16.6 times its expected earnings over the next 12
months. That is slightly above average, but not quite as pricey as
it was last February, when it hit 17.4.
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Earnings-based valuations could come down if first-quarter results
come in better than particularly gloomy analysts expect. Now, the
forecast is for first-quarter S&P 500 reports to show a 7-percent
decline in earnings from a year ago, according to Thomson Reuters
I/B/E/S data.
Earnings typically beat the gloomy expectations, so the decline in
analysts' forecasts that makes the P/E expensive is also a lower
hurdle to clear.
TECHNICAL INDICATORS SAY BUY
For the first time in 15 months, a technical measure of momentum is
flashing a "buy" signal at traders. The so-called weekly moving
average convergence-divergence (MACD) of the S&P is pointing to
positive inertia that could smooth the way for the market to push
higher.
"The U.S. markets are closer to the end of what amounts to a 2-year
correction cycle, rather than the beginning of a secular bear
market," Dan Wantrobski, chief technical strategist at New Albion
Partners in New York, said in a note to investors this week.
He said he expects volatility to remain high in the next few weeks
as the market finds a catalyst "before moving significantly higher."
The current rally has come with the support of healthier U.S. data,
a stabilization in the Chinese market, and a near 50 percent
increase in oil prices. Importantly, the Federal Reserve has walked
back from an expectation of four interest rate hikes this year to
two. These catalysts also need to remain in place for the rally to
continue.
(Reporting by Rodrigo Campos; editing by Linda Stern and Nick
Zieminski)
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