1) Stocks are not cheap right now: Alec Young at S&P notes that the S&P 500 is trading at 17 times 2009 earnings, expensive by historic standards.
The S&P has knocked on the door of 950 TWICE in the past week, and fallen back both times.
2) Stocks have been churning around for the last week or so, with no visible leadership. Financials have been sideways for a month, and now commodities and tech stocks have stalled.
3) Stocks are being pushed around by Treasuries and the dollar. In particular, the flattening yield curve has been led by a big move up in 2-year bond yields.
This has made the dollar more attractive, but has also made commodities more expensive.
- Stocks Slide as Dollar Soars, McDonald's Skids
- Rising Rates Could Threaten Economic Growth, Stock Rally
This is a two-edged sword: a recovering economy should have higher rates than what we have had this year, but the recovery is still very fragile.
4) While bulls argue that the recovery is still way too fragile to talk about Fed tightening, the market has been doing exactly that, increasing the odds of a Fed tightening this year.
Bottom line: stocks may be in for tougher sledding for the next few months. What we need is a return to the Goldilocks scenario, where the economy improves but not too much.
Any chance that stocks can break out? Yes: there seems to be much more confidence in the China recovery than the U.S. recovery. The Shanghai market is just off its highest level since July of last year; emerging market stocks in general are far outperforming the U.S. market.
But even here, a notable dollar rally will be a headwind.
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