Are market risks declining? You would think so, watching the market reaction to the French election. The French CAC at a 9-year high. The (VIX), after popping early last week to the highest level since the election, is collapsing today.
More importantly the U.S. is seeing a broad rally, with three stocks advancing for every one declining, and more than 200 new highs on the NYSE.
There are four major market risks we have been discussing for months. Here they are, and here's how I assess the risk factor for each:
Where does this leave us? The S&P 500, at roughly 2,370, is about 30 points below its March 1st record high. That is just a little above the middle of the trading range we have been in since the middle of March, that is, between about 2,325 and 2,400.
The likely outcome will be a short-term trading range but the long-term risk is clearly to the upside. Why?
Absent a geopolitical crisis, the other risks have a good chance of resolving to the upside. Earnings growth expectations are holding up, so far. U.S. economic data is likely to improve, which means there are no signs of an economic recession, the surest killer of rallies, and there isn't even a big indication of a correction on the horizon. Lowry's, the oldest technical analysis service, noted this morning that classic signs of market deterioration, like selective leadership and days of heavy selling, are still nowhere to be seen: "Those signs of lengthy deterioration are simply not in evidence at the present time."
No wonder the markets are rallying.