Bulls Take Back High Ground

In the span of just nine trading sessions, the S&P 500 has rallied from key technical support at 1,980 (its 200-day moving average) to post a new all-time high as of Friday, clearing 2,093 in a broad-based move. The past week was chock-full of bullish headlines that had the bulls charging back into equities and short sellers running for cover. It is a wonderful change in terms of the tale of the tape following six weeks of fierce volatility.

News from Europe in the form of stronger-than-expected fourth-quarter growth in the euro zone, coupled with a more cooperative dialogue with Greek leaders about adhering to bailout provisions and a peace accord reached in Ukraine, set the tone for a global market advance. Undergirding the good news from across the pond was the rebound in crude oil prices with WTI crude challenging $53/bbl.

To be sure, the current rally has some legs. There was hard evidence of a net outflow of capital from the bond market into equity markets with the utility sector absorbing the brunt of the selling pressure. The benchmark 10-year U.S. Treasury Note yield currently stands at 2.01%, almost a full half-point higher than it traded on Feb. 1 — an extreme move for such a short period.

At the same time, something isn’t right in River City when Food Stamp beneficiaries exceed 46,000,000 for 39 straight months, the labor participation rate remains in the 62% range, U.S. retail sales for January were down -0.9% and China’s trade balance plunged -19%, a massive move that prompted more stimulus from the People’s Bank of China. For the time being, market participants have turned a blind eye to such figures.

Earnings being reported for the prior week and for the month-to-date have been fair to mildly positive with much of the blame being put on a strong dollar that negatively impacts forex costs. That said, the list of S&P 500 companies raising forward revenue guidance is glaringly short as earnings have been bolstered by issuing debt at historically low yields to finance massive stock buybacks. In fact, future growth rate estimates for the S&P have been reduced on a net basis. Sure, gas prices are cheaper, but it’s not necessarily translating into increased spending.

Market critics contend that this method of reducing stock floats to shore up profits is masking underlying weakness. But with Europe showing signs of a turnaround and Asia still priming the pump, the glass for being long equities and equity-based income is more than half-full and even cash-rich companies like Apple (AAPL) that have demonstrated strong top- and bottom-line growth have jumped into the cheap financing game to repurchase stock. In doing so, these companies bring credibility to a strategy that is a favorite balance sheet maneuver for blue chip companies.

Not to be denied the spreading bullishness, high-yield assets skewed to an improving economy. Plus, incrementally higher interest rates also got in on the upside action. Let’s face it: with more than 10,000 Americans retiring every single day, getting 3% for investment grade bonds, 2% on Treasuries, 1% on CDs and next to zero for money market accounts, the appetite for yield is wide and deep in order to keep up with ever-rising living expenses.

One of the core holdings in my monthly investment newsletter, Cash Machine, is AllianceBerstein L.P. (AB). The company recently posted solid earnings of $0.57 per share that came in +11% higher than Street estimates, while assets under management increased to $476 billion during January 2015 from $474 billion at the end of December. Better yet, the company declared a $0.57 per share distribution for the quarter that puts the current yield at 8.5%. The stock is trading within a point of a new four-year high and has returned +28% to investors during the 14 months AB has been on the Cash Machine Buy List. This is my kind of stock and fits the profile of what I’m on the hunt for to add to my investment newsletter’s model portfolio.

Looking to the week ahead, the S&P is up against major technical resistance and flashing short-term overbought signals from almost every indicator I follow. So though the market has the appearance of ‘partying like it’s 1999” I would suggest, “not so fast, my friend,” instead. Look for the market to undergo some well-deserved consolidation as most of the larger near-term catalysts, in my view, are priced in, relieve itself of the overbought technical condition, preferably move in a sideways pattern and then make for new highs. I predict 2,300 as a year-end target for the S&P that would result in a 15% return — a very doable proposition if I say so myself.

I invite you to comment in the space provided below.