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Rising tide, meet all boats: US rally has global legs

Cristian Baitg | E+ | Getty Images

Amidst the lightest volume of the year, we have seen unusually heavy volume in exchange-traded funds (ETFs) associated with China, Turkey, South Africa, and Brazil. That's an indication that the U.S.-led rally has been broadening, especially in emerging markets, which have benefited from continued low global rates.

We are at or near 52-week highs in the stock markets in Thailand, the Phillipines, Vietnam, India, Brazil and Mexico. The largest emerging market ETF, the iShares Emerging Markets ETF, is at 3-year highs.

Meanwhile, emerging markets are surging this month:

Country Percentage gain Historical level

Brazil 7.1 1.5 year high

Vietnam 5.4 6.5-year high

Philippines 4.3 1-year high

Thailand 4.1 1-year high

Mexico 3.7 1.5 year high

India 2.5 Record high

As for the developed world, Europe has rallied off the early August lows but are still not back to the June-July highs. Traders are obsessed with the "why" and "what" of the market. So why does the market keep rising?

1) Low rates;

2) Low commodities;

3) Slowly improving economy;

4) Record earnings; and

5) The U.S. is (still) the best place to put money. On the flip side, what could derail the rally?

1) A rapid rise in rates (above-expectation economic numbers, a change in the Federal Reserve's policy outlook, etc.)

2) Significant profit margin deterioration. We are at record high profit margins, but higher commodity prices or labor costs (commodities or labor) would compress earnings. Corporations would need to raise prices, a difficult proposition.

Elsewhere

After more than a year of discussion, the Securities and Exchange Commission (SEC) filed a proposal for a pilot program to explore trading small-cap stocks in increments other than a penny.

The purpose is to see if trading in increments between one cent and five cent might increase trading volume. This is a complicated proposal: the pilot will have one control group and three test groups with 400 securities in each test group, and will run for a year. The SEC is opening the proposal to a 21-day comment period.

This is the latest chapter in a decades-long saga that tries to answer the question: what's the right spread for stocks to trade at? As far back as 1994, when stocks were trading in increments of an eighth of a dollar, there were questions that the "spread" was excessive and that it would be better to go to decimal prices. A few years later, trading went to sixteenths of a dollar, then in 2001 to a penny.

A funny thing has happened though: trading in many small-cap stocks have dropped significantly since then. Some are blaming the simple fact that for active market makers it is not profitable to trade these stocks in penny increments. The decline in analyst research has led many good stocks to languish, the argument goes.

The Street has argued that allowing small cap stocks to trade in increments other than a penny would increase trading, incentivize more public offerings of small companies, and attract more analyst coverage.

I'm not sure that will happen, and I'm particularly sensitive that retail investor trading costs would rise. However, I am sure that everyone is concerned about low trading activity in all stocks (but especially small cap stocks). As a result, I don't know anyone who is opposed to a pilot program to see if it really does increase trading.

--By Bob Pisani

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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