Does this Bull Market Still Have Legs?

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Sell everything? That has been the recently intensifying mantra of a number of high-profile investors from DoubleLine Capital's Jeff Gundlach to strategist at Goldman Sachs, who made a near throw-in-the-towel call early last week.

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Goldman's so-called risk-appetite indicator isn't singing a bullish tune. To be fair, the investment bank has been neutral on stocks since May. Gundlach has said that assets, perhaps stocks in particular, look frothy while economic growth is muted and earnings are nothing to write home about.

However, those messages don't seem to be fazing market participants, who helped to propel the S&P 500 index and the Nasdaq Composite Index to all-time highs, breaking the main indexes out of a multisession funk which had mostly seen equities mired in the mud, even with Tuesday's slightly firmer retreat.

Most notable in the rally was that the Nasdaq Composite, which joined the S&P 500 and the Dow Jones Industrial Average in ringing up a fresh record after a lengthy hiatus, scoring its first new closing high since July 20, 2015.

Year to date, the Nasdaq Composite is up 4.3% and both the S&P 500 and Dow industrials are looking at a more than 6% rise in 2016, as of Friday's close.

Upbeat jobs report

Friday's trading action followed a convincingly upbeat jobs report, which unleashed some latent bulls.

Similar to the last major assault on new records for stocks back in early July, it was another nonfarm-payrolls report that delivered the shot in the arm.

The NFP report offered a rather unequivocal demonstration of labor-market strength (or at least served up a consistent headline number after the aberrant May reading), with the data showing that the U.S. generated 255,000 new jobs in July. That trounced economists's expectations. Rising wage-growth may also be encouraging for the Federal Reserve, which has been wrestling with stubbornly low inflation and a lack of conviction about raising interest rates off the floor.

Is this an environment in which investors should be dumping risk assets?

"The ingredients for a bear market just aren't there," Jim McDonald, chief investment strategist at Northern Trust, told MarketWatch.

McDonald said he's not seeing a lot of reason to retreat to the sidelines in these markets, but that's exactly what he's seeing clients do.

"Many investors I speak with are still fairly cautious on the outlook for the market, which tells me that there's still money on the sidelines," he said.

McDonald said investors may be too defensive: Overweight bonds, which are perceived as safe, and underweight stocks.

Bonds endured a bit of a drubbing on Friday, as stocks rallied, pushing the yield on the 10-year Treasury note up 12.5 basis points to 1.583%, compared with about 1.49% before the jobs report, as evidence of robustness in the labor market signaled that the Fed might be justified in resuming the normalization of monetary policy that has been stalled since December.

Two-year Treasury yields , which tend to be the most sensitive to shifting interest-rate expectations, saw the largest one-day jump since May 18, according to Dow Jones data.

Gundlach, and recently J.P. Morgan Chase & Co. (JPM)CEO Jamie Dimon on Aug. 1, have cautioned against scurrying to scoop up Treasurys for fear of a sharp selloff that could drive yields precipitously higher.

However, a combination of accommodative monetary policies that have cast a shadow across the rest of the globe likely will keep U.S. Treasury yields in a fairly low range of around 1.5%, said McDonald.

"We don't think yields are going to move up very much," he said.

Main concerns

Caution about the ability of stocks to climb amid less-than-stellar fundamentals has been among investors's main concerns about the market.

"It's sentiment that's driving the markets higher, not the fundamentals," said David Lafferty, chief market strategist at Natixis Global Asset Management.

"I'd love to see earnings growth improve," he said.

Indeed, weak earnings is the most frequently mentioned worry for even bullish investors. And with a good reason. Aggregate earnings-per-share for S&P 500 companies are on course to decline 3.5% from a year ago, according to FactSet. That's with about 90% of all companies reporting quarterly results though Friday.

Moreover, earnings are on pace to see the fifth-straight quarter of year-over-year declines--the longest such streak since the five-quarter stretch from the third quarter of 2008 through the third quarter of 2009.

Still, markets have been shaking off these results to head higher, sometimes defying logic and fundamentals.

A recent Thursday research note from Citigroup, says that investors shouldn't stand in the way of a rallying bull, despite all the signals that are screaming head for the hills.

"Those more inclined to stand in front of the S&P juggernaut should understand that the U.S. stock market shows some characteristics which remain highly desirable to global investors. Some time it will be right to reverse this classic momentum trade, but we prefer to pick our fights elsewhere," Citi wrote.

"The market always moves in the direction that causes the most amount of pain," said Mike Antonelli, equity sales trader, at Robert W. Baird & Co.

Antonelli takes solace in the fact that the investors haven't gotten overly euphoric, following the oft-quoted adage from Sir John Templeton: "Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

"Previous market highs have been basically characterized by extreme euphoria and you don't see that here," Antonelli said.

Warning signs

So, what about all the smart money flashing warning signs, including the likes of Janus Capital Group's Bill Gross, who heads its unconstrained bond fund?

Nicholas Colas, chief market strategist at ConvergEx Group, put it this way to MarketWatch:

"It is so hard to go against what is clearly smart money, but no one has really outlined a specific reason why things should break down. Just a lot of issues that are already known. Very valid, but known."

Of course there's merit to calls for caution and prudence from the smart-money club.

"We're not in the cohort of cash cowards but we do think that valuations are stressed," Natixis's Lafferty said.

But the strategy of dumping everything seems like hardly a strategy at all.

"'Sell everything' is not advice, it's marketing," said Michael Batnick, director of research at Ritholtz Wealth Management. "Nobody that has your best financial interests in mind would ever say those two words."

Batnick said the best advice for investors isn't to panic, or get too euphoric, but rather to keep their eyes on the long-term prize.

"Even if [the smart money] is right, and every asset class does a U-turn and heads lower, you will never hear this person come back and say buy everything," Batnick said.

"They have to be right twice, the odds of this are effectively zero," he said.

By Mark DeCambre, MarketWatch

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