Stealth Bull Market?

On CNBC last Friday, we stated that we have been in a stealth bull market. Indeed, after anticipating the stock market’s bottom in early February, the stealth bull market emerged. So what’s a stealth bull market? Well, while the major market indices are marginally better year-to-date (YTD), many of the other indices are up double digits. For example, the D-J Industrial Average is up some 1.21% YTD, while the S&P Small Cap 600 is up 11.70%, the NASDAQ Composite has rallied 13.36%, the NASDAQ 100 +15.31%, well you get the idea. Moreover, many of those indices have tagged new all-time highs, as have most of the Advance/Decline Lines. As our friend Leon Tuey writes:

Those who are waiting for "clarity" have already "missed the boat" and when the major market indices hit new highs, no doubt, they will be complaining that the market is too high or that it is overvalued. . . . The market's resiliency is not surprising. The market is telling investors that a "Trade War" is unlikely. What is behind the market's strength is improving earnings momentum. Also, as mentioned in my recent reports, sentiment backdrop is ideal as fear is universal. Everyone is frothing at the mouth about the "Trade War." Moreover, the supply/demand condition is bullish. This year, corporate share buybacks reached a record. Meanwhile, investors continue to reduce equity holdings. The dummies are selling, but the smart/informed investors are buying.

Further, there is the chance we have entered a “buying stampede.” Recall that buying stampedes typically last 17-25 sessions, with only one- to three-session pauses/pullbacks, before they exhaust themselves on the upside. It appears to be the rhythm of the thing in that it takes that long to get everybody bullish enough to throw in the towel and “buy ‘em” just in time for a trading top to arrive. While it is true some stampedes have lasted 25-30 sessions, it is rare for one to go more than 30 sessions. If this is such a stampede, today is session 11.

Meanwhile, we have entered earnings season, and my conversation on CNBC turned to the financials and why they are not responding to good earnings. We said that too many investors are paying attention to the yield curve thinking the financials are not going to do very well until the yield curve steepens. We also stated there are financials and then there are financials. While it is true the large cap banks have stalled out, the brokerage stocks have done pretty darn well. Likewise, the small cap banks have done well. This small bank stock performance is reflected in David Ellison’s Hennessy Small Cap Financial Fund as well as Anton Schultz’s RMB Mendon Financial Services Fund. Speaking more to this earnings season, over previous quarterly earnings reports, earnings have tended to come in better than most expected. We do not think it will be any different this time. In fact, consensus estimates suggest that there will ~20% earnings growth over the next four quarters. One credible service is actually forecasting $200 in earnings for the S&P 500 in 2020. If that is anywhere near the mark, it implies the S&P 500 (SPX/2801.31) is trading at 14x 2020’s earnings estimate. Using this year’s estimate (~$158) yields a price to earnings (P/E) ratio of 17.7x, while using next year’s (~$174) produces a P/E of ~16x. And, it is not only earnings that are soaring, but revenue growth has kicked in, as well (charts 1 and 2 on page 2).