Stocks again hit historic highs today. Stocks have been strong because risk has been lower recently. Earnings guidance for the year has been strong. The global economy is improving. And the geopolitical risk from Europe is much lower.
Traders have been complaining about the low volatility, but that's historically not a problem for markets — stocks can do fine during periods of low volatility.
Why are the markets in such a tight trading range? It's simple. Right now stocks are relatively pricey, so buyers are only modestly enthusiastic about buying more — many would rather wait for prices to drop and then buy more. The sellers are not enthusiastic about selling because they see the better earnings and improving
This is a perfect example of the law of supply and demand: Modestly higher demand coupled with little eagerness to sell (falling supply) means prices tend to drift upward in a tight range.
The master of this is Lowry's, the oldest technical analysis service in the United States, which has made supply and demand the cornerstone of its technical analysis for more than 70 years.
Here's what Lowry's said to clients this morning about the current market: "Bull markets accompanied by rising Demand and falling Supply historically carry a very low risk of failing."
What does carry a risk of failing? When traders start selling at an accelerating pace, and traders stop showing any interest in buying at lower prices. Lowry's said, for example, that this is what happened in 2007, when selling pressure began to trend higher in June 2007, about four months before the final market top in October 2007. Trader interest in buying also began dropping and was much lower by the time of the top
This is not what Lowry's is seeing now: Buying interest has been higher since November 2016, and selling pressure has been lower.
There are other positive indicators as well: Market breadth has been strong. Bull markets almost invariably end with increasingly selective buying interest. That is not happening: "[T]hese measures of market breadth suggest continued clear sailing ahead for the bull market."
Lowry's does note that another indicator — the number of stocks at 52-week highs — has been a bit weaker recently but says it has not yet reached a critical point.
Its conclusion: "[T]he probabilities still favor more months of