The Bulls are Back, but for How Much Longer?
U.S. stocks bounced back strongly on Thursday, as upbeat corporate results drove gains on Wall Street after a disappointing previous session. Although volatility pulled back sharply on Thursday, the general trajectory appears to be higher, leaving some analysts concerned about the bull market’s sustainability the rest of the year.
Stocks Bounce Back
All of Wall Street’s major indexes put up solid gains in New York, with the large-cap S&P 500 Index adding 0.8% to 2,585.64. Nine of 11 sectors contributed to the positive result, with telecommunications services adding 1.8%. Shares of consumer staples rose 1.6%, while technology-as-a-sector added 1.3%.
The only decliners on Thursday were energy and utilities, which shed 0.6% and 0.4%, respectively.
The Dow Jones Industrial Average also put up sharp gains, adding 187.08 points, or 0.8%, to 23,458.36. Twenty-three of the Dow’s 30 index members finished higher.
A strong showing in the technology sector drove massive gains in the Nasdaq Composite. The tech-laden average climbed 1.3% to close at 6,793.29.
Quarterly results from Dow blue-chips Wal-Mart (WMT) and Cisco (CSCO) were the main catalysts for the gains on Thursday.
Wal-Mart exploded on both the top and bottom lines thanks to surging online sales. The retailer earned an adjusted $1 a share on $123.18 billion in revenue. The company reported that U.S. comparable-store sales rose 2.7% year-over-year, the thirteenth consecutive quarter with positive results.
Global tech firm Cisco also beat analysts’ expectations, finally ending an eight-quarter streak of revenue declines. The company reported $12.136 billion in revenue for the first quarter of 2018. Adjusted per-share earnings came in at 61 cents. Cisco also estimated that second quarter revenues would grow between 1% and 3%.
Earnings season is winding down, with the majority of companies posting better than expected results. As of Nov. 10, the blended earnings growth rate for the S&P 500 was 6.1%, according to financial research firm FactSet.
Bull Market Showing Signs of Fatigue
Stocks may have come back strong on Thursday, but the underlying trend shows the bull market is showing signs of fatigue. Record highs have been harder to come by and much smaller in terms of growth than at other periods during the year. Many leading measures also indicate that sectors such as technology are overvalued, and have been for some time.
One of the most convincing signs that the bulls are slowing their advance is the behavior of the CBOE VIX. Known as the “fear index,” the VIX measures investor sentiment over the next 30 days. When the VIX rises, it usually means stocks are on the decline. On the flip side, a fall in the VIX is generally associated with rising stock prices.
Volatility has been creeping higher for the past two weeks, and on Wednesday, reached the highest level since the summer. The fear index declined more than 10% on Thursday as stocks resumed their uptrend.
The VIX has been undervalued for quite some time. Normally trading at or around 20, the volatility index has spent most of the year between 10-15, including multiple stints in the single digits.
Although we are in the best six months of the year for equities, the next few months could prove more difficult than we’ve grown accustomed to for most of 2017. The equity market’s outlook is complicated by a myriad of factors, including President Trump’s proposed tax reform.
Earlier this week, Republican Senator Ron Johnson announced his opposition the tax plan put forward by the Senate. As it currently stands, there’s a pretty good chance corporate tax reform will take years to materialize.
Disclaimer: The writer owns U.S. stocks, cryptocurrencies and other financial assets.
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