Why are U.S. stocks so strong right now?
In last month’s report, I discussed five reasons to be long US equities. Recent strength in stocks surprised even me: as of July 31, the S&P 500 Index gained over five percent during the first month of the third quarter. All the points I made remain valid. Let’s highlight a couple of additional thoughts and observations:
Is the US stock market melting up?
Investopedia defines a stock melt-up as a “dramatic improvement of investment performance of an asset class.” Technically, it is easy to recognize such a phase – price momentum accelerates.
Current monthly charts of major indices hint that stocks could enter a melt-up phase. In this case, equities could easily double their current 2013 gains until the end of the year. However, it is difficult to predict such a development and one can only apply classical trend following principles.
So why are US stocks so strong? There are simply not many investment alternatives: Most of Europe is in a recession, China and Japan have issues (see below), most commodities have been losing value and global interest rates remain low.
Technology stocks took over leadership
Starting in May, the Nasdaq Composite Index began to outperform the general market and has also been leading in July. It is a healthy sign of a rally to see sector rotation during consolidation phases.
It is obvious that investment money has been moving from defensive sectors, such as Utilities, into Technology since the April consolidation. In my opinion, the current trades of this sector are Apple, Cray, SunEdison and Tibco Software.
Housing sector has lost its mojo
It seems surprising that housing stocks broke their uptrend, which started in 2011. The US housing market has been recovering in 2013, but recent housing starts and building permits numbers have been disappointing. Markets are forward-looking, housing stocks now anticipate headwinds from higher interest rates.
Dr. Copper in a difficult position
Copper prices have been under pressure since the beginning of 2013. Futures are trading at the important $3 support level, driven by China slowdown fears. The question is if these fears could spill over to global markets and even hurt the US stock rally. China brings us to the next topic: Japan.
Japan: Can Abe convince the markets?
Japan stocks did have a good 2013 so far. The Nikkei 225 Index (NKY) is up about 40% as of August 3. Unfortunately, the market recently has been acting very volatile. Not a good sign of a healthy rally. Market participants are unsure if Japan’s policy will lead to economic growth. The “long Japan equities, short Yen trade” is very crowded and leaves room for disappointment.
I’m closely monitoring the Asia theme since it has the potential to put an end to the U.S. rally. So far, investors have been ignoring the developments, so “the trend is your friend until it ends.” So far, I’m trading from the long side.
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