Can anything pull stock prices back to earth?

U.S. equities moved further into record high terrain again on Tuesday, showing a steadfast resistance to anything resembling selling pressure since the middle of August. The action was nearly a carbon copy of Monday's: An accelerating ramp at the open moderated into the closing bell. No major catalysts were in play, although solid September auto sales got some attention.

The focus remains on the near vertical rise in small-cap stocks (chart below), which actually spent the bulk of the day trading in negative territory before rallying into the closing bell -- ensuring all the major averages notched a new record high.

This market doesn't feature a lot of texture or undercurrents. Instead, it's a continuation or even a heightening of trends that have been in play for months if not years. The extinguishment of volatility, rock-solid belief in the U.S. economy's stability and healthy corporate earnings -- all with the backstop of excess liquidity sloshing around the financial system.

Sentiment remains white-hot, valuations are extended, seasonal headwinds don't seem to matter (with September and October historically two of any year's worst months) and investors appear determined to believe President Trump's tax reform plan is a slam dunk. 

The folks at SentimenTrader note that their model measuring greed vs. fear recently moved to tie the second-highest reading seen since 1998.

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It seems like nothing will stand in the way of higher stock prices -- including the Catalonian independence referendum and the worst mass shooting in U.S. history in Las Vegas. Not sure if we should feel pride or disgust, to be honest. 

Even Wall Street is being caught off guard by the unending uptrend, with the S&P 500 just 70 points below Goldman Sachs' end-of-year target -- for 2019. And on a relative-strength indicator basis, the Russell 2000 is at its most overbought since October 1997 after rallying the last 24 days out of 29.

The fundamentals are stretched. The recent earnings bounceback was predicated on easily leaving behind the oil-price lows on a year-over-year basis. That's threatening to go in reverse now as crude oil starts to hooks lower. At the same time, valuations are super-high: Societe Generale noted that global earnings are back to 2014 levels (when energy peaked), yet stock prices are 15 percent higher.

One thing that could upset the apple cart: The Federal Reserve will start reducing its balance sheet this month, reversing years of quantitative easing that started in early 2009. So keep an eye on the bond market: A weakening there, and a concurrent rise in long-term interest rates, could give investors a reason for at least a temporary pause. 

  • 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.