What's firing stocks into record terrain

Last Updated Apr 25, 2017 8:34 PM EDT

The Dow Jones industrials average pushed above the 21,000 level on Tuesday -- returning to levels not seen since early March -- before closing just below that mark, at 20,996, or 1.1 percent higher. Tuesday’s jump capped an epic two-day “gapped” move higher. By gapped, I mean stocks jumped above the prior day’s range as trade opened and then built on those gains over the course of the day. That’s a sign of serious, intense buying pressure.

In another bullish sign, the Nasdaq Composite topped 6,000 points for the first time Tuesday, closing at record-high 6,025, up 0.7 percent on the day. The S&P 500 index climbed 0.6 percent, or 14.5 points, to close at 2,389. 

Meanwhile, a CBS News poll released Tuesday found that 60 percent of Americans think the economy is in good shape.

The surge puts a dramatic end to a quiet two-month downtrend as investors burned off some of their post-election ebullience. Concerns focused on a lack of legislative progress by the Trump administration, weakness in “hard” economic data points like retail sales, a renewed decline in crude oil prices and global geopolitical tensions.

While most of these factors remain in play, stocks had drifted enough that the situation was primed for a relief rally on any positive surprise. 

That came Sunday as investors cheered results of the first round of voting in the French presidential election. Both pollsters and Wall Street analysts predict an overwhelming win in the runoff next month for centrist Emmanuel Macron over populist insurgent Marine Le Pen, a result that would comfort financial markets.

Yet the market rally, while ferocious, looks fragile, suggesting it could burn itself out sooner than many realize.

First, the big gains over the last two days are narrowly focused in two main industry groups that tend to carry more “weight” in the broad market averages and therefore are able to move the rest of the market around by the scruff of the neck: financials and technology stocks. Notably, for example, the Nasaq’s run-up owes largely to big moves by familiar names such as Alphabet (GOOGL), Facebook (FB) and Microsoft (MSFT

Yet while some big tech companes are surging, other stocks are lagging behind. Although the S&P 500 is within a hair of its record high, only 72.6 percent of the stocks listed on the index are in uptrends -- that’s down from 80 percent in early March. Similarly, only 64 percent of NYSE volume is going into advancing issues, down from 85 percent back in the middle of March.

Second, much of the intensity behind the recent jump in stock prices seems to be tied to a dramatic move higher in the euro-yen carry trade. Hedge fund types have frequently “sold” the Japanese yen in recent years to fund trades in dollar- or euro-denominated assets, thanks to aggressive efforts by the Bank of Japan to devalue its currency.

Today, Reuters reported that officials from the European Central Bank are hinting at a reduction of cheap-money stimulus as soon as this summer given the French election results. That’s bolstering the euro in a major way and lifting risky assets in general.

Let’s also not forget that many of the factors that have kept stocks range-bound since March are in still in play.

Crude oil prices moved lower again today before closing up 44 cent a barrel to $49.66, as market oversupply, bloated inventories and growing U.S shale production remain problems. President Donald Trump’s tax proposal, to be unveiled Wednesday, faces the prospect of resistance from both Democrats and Republicans in Congress. And rising consumer confidence in recent months has yet to translate into faster economic growth. Some forecasters project the nation’s GDP will come in at less than 1 percent when the Commerce Department releases first-quarter figures on Friday. 

Finally, Jason Goepfert at SentimenTrader noted that the last time stocks surged in a dramatic way -- as measured by the Bollinger Band indicator -- was last August, which marked a medium-term top for the market. 

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.