Talking Numbers

Are investors buying stocks for the wrong reasons?

Are investors buying stocks for the wrong reasons?

Could too much of a bad thing actually be good? That appears to be the case with U.S. equities, which continue to rally despite a preponderance of bad news.

In the past month, The Dow Jones industrial average has jumped almost 4 percent despite a number of events (sluggish U.S. job growth, a depressed European economy, a surging dollar, Russia, ISIS) that would typically have investors running for the exits.

So what gives?

"I call it the TINA Phenomenon," said Enis Tanner, global editor for "There Is No Alternative (TINA) for U.S. stocks, which are once again outperforming their global peers in 2014."

Tanner points out that a number of factors that would seemingly be bad for stocks have actually created an environment where stocks can flourish. Europe's economic problems (and tacit backstop by the European Central Bank) have led to historically low rates across Europe.

That has helped keep rates here at home low as many European sovereign nations now sport bond yields well below those of U.S. Treasurys.

And the geopolitical turmoil in Ukraine and the Middle East has only helped suppress those low rates, as Treasurys have enjoyed a so-called fear bid.

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"The geopolitical tension is keeping rates low for the fear trade," said Gina Sanchez, founder of Chantico Global. "As long as rates stay low, we're fine."

Other seemingly negative developments in the global markets are also helping stocks here. The dollar surge, which typically occurs in period of risk aversion, has helped keep commodity costs like oil low, and that has in turn put more money into the American consumer's pocket.

Still, some traders are beginning to worry that investors are buying stocks for the wrong reasons.

"Incomes are terrible. The fundamentals are not that great" said David Seaburg, head of sales and trading at Cowen and Co. "If this market is going to rally, we are going to have to see top-line growth. And we haven't really seen robust revenue growth. That's a problem," added Seaburg.

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That also might explain why the Dow has stalled out from a technical perspective.

"We continue to struggle here with previous highs," noted Rich Ross, global technical strategist at Auerbach Grayson. "We tested the previous 200-day average but can't seem to break out from the high." When stocks retest previous highs, or form what is known as a "double top formation," they often stall out in the medium term.

Also of note is the underperformance of the Dow itself, which continues to badly lagged the S&P 500 year to date. Typically, the two have been highly correlated. The Dow is up 4 percent this year while the S&P is up almost 9 percent.

Said Ross, "I think that's a bearish divergence."


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