Assessing a Rally of Historic Proportions

It was a mixed week for U.S. stock markets, with the Dow Jones up 0.59%, the S&P 500 gaining 0.52% and the NASDAQ down 0.65%. The MCSI Emerging Markets Index ended the week essentially flat.

Big gainers in your Bull Market Alert portfolio included United States Oil (USO), which rose 4.98%, and Sociedad Química y Minera de Chile S.A. (SQM), which moved up 4.68% for its first week in the portfolio, and also hit a new 52-week high.

After the worst start to the year in its history, the S&P 500 has been on a tear. Now up 15.44% from its February lows, it has now gone 10 weeks without trading beneath the low from the the prior week. That’s its longest winning streak since February 2011. To put that into further historical perspective, between 1928 and 1952, the market had never managed to go longer than nine weeks without dropping below a prior week’s low. So the recent rally is of historic proportions.

So what does history tell us?

Over the shorter term, returns in the market were weak, with a negative average after a month. But two to three months later, returns were mostly positive.

Still, every market is different, and there is little question that the U.S. stock market is at a crucial juncture.

On the one hand, several market sentiment indicators are showing readings that have consistently led to downside in the short- to medium-term. The CNN “Fear and Greed” indicator has been flashing “greed” for well over a month now. In addition, the S&P 500 has not been able to break out to a new high. Finally, we are entering a seasonally weak time of the year. Remember, “Sell in May and go away.”

On the other hand, market breadth and momentum suggest limited downside and that the multi-month rally in stocks will continue in the weeks and months ahead. Technical analyst Tom Asprey of Forbes.com argues — compellingly, I think — that the strong action of the Advance/Decline lines is a clear indicator of the market’s underlying strength. In addition, the low level of investor participation in the stock market is a strong indicator that any new high in the averages will not coincide with a major bull market top.

Still, I expect the market to consolidate its recent gains or even pull back over the coming five trading days.

That’ s why I am holding off on making a new Bull Market Alert recommendation this week.

Portfolio Update

United States Oil (USO) gained 4.98% last week. Oil closed out a strong week on news that oil production continues to drop, and a report that the U.S. oil rig count fell by another eight rigs. The gain in oil prices persisted despite news that no consensus was reached on limiting production in the Doha, Qatar, meetings. USO is above the 50-day moving average (MA) and remains a BUY.

iShares MSCI Emerging Markets (EEM) closed the week flat. This large, emerging markets exchange-traded fund (ETF) continued its recently predictable trading pattern, gaining one week only to pull back the next. However, the collective move has been bullish, and one that appears primed to continue. EEM is comfortably above both its 50-day and 200-day moving averages and is a BUY.

Domino’s Pizza, Inc. (DPZ) fell 4.48%. Despite tumbling last Friday, Domino’s fundamentals remain strong. It’s 7.2% in new unit growth beats Papa John’s 4.7% figure and blows away industry-leader Pizza Hut’s 2.9% growth numbers. DPZ reports earnings on April 28 before markets open. DPZ remains a BUY.

The TJX Companies, Inc. (TJX) dipped 1.00%. Goldman Sachs (GS) added TJX to its global “GS SUSTAIN” Focus List and highlighted the company’s strong financial performance. GS cited TJX Companies’ particularly strong response to online retail competition and noted its sustained shareholder returns going all the way back to 2010. A Goldman Sachs analyst also wrote, “TJX is well-positioned to continue to grow earnings in the future, as we believe customers will continue to be focused on value.” TJX is a BUY.

Sociedad Química y Minera de Chile S.A. (SQM) moved up 4.68% for its first week in the portfolio, also hitting a new 52-week high last Thursday.  SQM holds some of the most fertile lithium-producing ground on earth, and should continue to soar as lithium demand continues to explode in the coming years. SQM is a BUY.

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