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Pro Analysis

Santoli: Complacent, expensive market keeps finding a way to frustrate the bears


Traders work on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters
Traders work on the floor of the New York Stock Exchange.

The bears have gone hungry for months in a market that's giving the bulls plenty to graze on.

Since the popular assumption of a market tumble if Donald Trump won the election was proven wrong within hours, the major indexes have made their way to a succession of new highs without much downside drama along the way. In fact, the S&P 500 has gone 79 sessions without posting a 1 percent or greater daily loss, the longest such streak in more than a decade.

It's also been 34 days since the index even traded in a 1 percent range from low to high – the calmest stretch since 1995. This hard-to-rattle market displaying an upside bias has been impressive on the surface, but it's times like these when it's best to ask what might disturb this comfortable trend.

The bears' frustration is not just about President Trump and Wall Street's preferred focus on potential tax cuts and deregulation rather than trade tensions, geopolitical frictions or bullying of CEOs. In fact, it's easy to explain why stocks are up where they are without leaning much on Trump talk.

The macroeconomic picture has remained rather bright. The ISM manufacturing index hit a two-year high last week. Payrolls grew more than forecast in January. The Economic Cycle Research Institute's leading indicator rose to a record high in recent weeks. The Atlanta Fed's GDPNow real-time forecasting model for the current quarter is up to a 3.4 percent annual rate. European growth has picked up nicely, and the economic-surprise index for emerging markets has reached a five-year high.

Corporate earnings so far have been just good enough to support the broad market and leave intact the expectation for a further pickup in coming quarters. Companies are beating earnings and sales forecasts at a lower-than-average rate, and negative guidance has been given at twice the pace of positive outlooks. The full-year S&P 500 profit projection is not eroding as much as it typically does during reporting season, though, according to FactSet.

Much of this improvement was likely priced in with the market's 10 percent rally in the 12 weeks heading into earnings season (not to mention the 25 percent surge from 12 months ago). And there have been plenty of trap doors in various sectors, such as retailers and airlines. But here again, the bears who are impatient for a stiff market setback lack a broad set of fundamental catalysts to rely on.

The technical condition of the market has remained an asset. Most chart experts continue to cite the solid uptrend, the indexes holding above relevant moving averages, cyclical sectors outperforming defensive ones and measures of underlying market stress remaining subdued. Key groups such as bank and transportation stocks have stalled but not reversed lower in any important way.

Are stocks bumping against a ceiling, perhaps? The S&P 500 was turned back four days out of the last seven at levels between 2298 and 2300. The small-cap Russell 2000 has been unable to make a new record high along with the S&P, Dow industrials and Nasdaq.

Bears are watching this quiet struggle against stubborn levels as momentum measures have waned and the tape has become less broadly inclusive in recent weeks.

Still, even a failure in this area would first likely mean a pullback of a few percent or so, which likely wouldn't upend the broader positive trend unless other pockets of macro or capital-markets stress picked up. Right now, liquidity conditions are undeniably strong, with speculative-debt spreads tighter than they've been in years.

In looking at these and other indicators, the bears are left holding onto some version of "Everything's so good it's due to turn bad" idea, the notion that high valuations, a long stretch of uncommon calm and widely shared optimism precede some form of comeuppance for contented bulls.

One source of support for this stance is a mosaic of investor sentiment gauges showing a good deal of confidence. The long-running Consensus Inc. survey of professional traders is above 75 percent bulls on a four-week basis for only the 11th time in three decades. The similar Investors Intelligence newsletter measure has had three-times as many bulls as bears for three weeks running.

Corporate insiders have been selling their employer's shares at an aggressive pace the past two weeks. The prolonged dull trading action is finally wearing down the will of traders who speculate in rising volatility: The prices for futures on the VIX Volatility index relative to the VIX itself are eroding toward levels that have preceded stormier markets in the past.

Most of these are atmospheric conditions that reflect what's been a strong market amid upbeat news flow – but they don't provide any trigger in themselves for a reversal.

Bank of America Merrill Lynch strategists keep a Bull & Bear Indicator based on fund flows and other inputs, which hit a two-and-a-half-year high last week. The strategists say it remains below the extreme danger zone, though.