The blue-chip Dow Jones Industrial Average closed over the 22,000 mark for the first time on last Wednesday, but investor fears about the sustainability of the gains took the shine off the round number milestone.
The rally lost momentum during the day’s trading and despite the recent run up, helped by strong earnings from Apple Inc and Boeing Co, some technical indicators were flashing warning signs.
“The market gain has been built on a narrow group of issues. That typically is not indicative of great health,” said Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott in Philadelphia. “I would not be shocked... if we saw a pullback.”
And with the Dow industrials at a record high, Dow theory suggests that the Dow Transportation Average index should also hit a record in order to confirm the market’s march higher.
But that index trails the Dow industrials’ year-to-date performance by almost 10 percentage points and is nearly 6 per cent below its own July 14 record high.
Also, overall market breadth, or the number of winning stocks relative to losers, is weakening even as the major US indexes hover near record highs. That means the broad gains have been driven by advances in a declining number of companies, and market watchers fear they could be hard to sustain.
The number of 52-week lows among NYSE- and Nasdaq-traded stocks is at its highest since late June while the number of 52-week highs has dropped sharply since mid-July.
Apple, McDonald’s Corp and UnitedHealth Group Inc have each added more than 200 points to the index.
The more than eight-year-old bull market in US stocks got a second wind after last year’s election of Donald Trump as US president, on expectations that his business-friendly policies including tax cuts and deregulation would boost corporate gains and economic growth.
But tax cuts and other parts of the Trump agenda have not materialized, leaving earnings growth as the real engine of the market.
“Earnings growth allows the market to be patient about Washington. It allows the market to be patient about fiscal reform,” said Steven Chiavarone, Portfolio Manager at Federated Investors in New York, who said they would “be buyers on any weakness.”
Fundamentals remain strong. With 350 of 500 companies’ reports in, the S&P 500 index is on track to post back-to-back double-digit quarterly earnings growth for the first time in almost six years.
Still, the market is expensive by historical standards. Investors are paying $18 for every $1 in expected S&P 500 earnings over the next 12 months, near the highest since 2004 and above the long-term price-to-earnings average multiple of 15. — Reuters
Rodrigo Campos
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