The more records the
Dow Jones Industrial Average
breaks, the more itchy contrarians get about signs of a market peak.
First on their list is sentiment, which as measured by MarketVane and the American Association of Individual Investors has reached levels last seen at the market's spring highs. Second, some bedrock sectors in the market have seen some profit-taking, such as financials. Third, some previously cautious, and arguably bearish, commentators have turned more bullish.
Even with some contrarian signs, earnings season is relatively robust, and major averages keep pushing higher.
On Thursday, the Dow closed for the first time over 12,000, gaining 0.16% to 12,011.73. The
gained 0.07% to close at 1366.90, while the
closed up 0.2% to close at 2340.94.
Powering the Dow were shares of
, which all gained over 2% on the day. Laggards included
, which all fell more than 1%.
After the closing bell,
posted strong earnings that beat expectations and sent its shares up 6.6% in recent after-hours trading.
But disappointing earnings reports out of the financial sector make investors nervous about the rally's sustainability. The financial sector comprises more than 22% of the S&P 500, and after a huge summer rally, most companies are priced for perfection.
Bank of America
reported earnings growth. But shares fell 0.64% and 1.02%, respectively, as investors worry about future revenues given the persistent inversion of the Treasury yield curve. (With short-term rates higher than long-term rates, a major profit center for banks is removed as they are no longer able to profitably borrow short and lend long.)
and brokerage firm
Jefferies & Co
, have also disappointed investors this week, sending their shares tumbling and the overall banking and brokerages indices into the red. The Philadelphia/KBW Bank Sector Index fell 0.75% Thursday, while the
Amex Securities Broker Dealer Index
The financials' weakness comes against a backdrop in which the so-called old leadership is once again taking the reins. Metals, energy and basic materials sectors performed well Thursday amid modest gains for the underlying commodities. The Philadelphia Stock Exchange Gold & Silver Index rose 3.4% behind strength in
, while the Oil Service Index climbed 3.4% behind
, which posted strong quarterly results.
Newly and still somewhat cautiously bullish Louise Yamada, of Louise Yamada Technical Research Advisors, says the return to old leadership is a positive sign for the market. However, it may not bode well for the Dow, particularly if the old small and midcap leadership come back as well.
"Everything is rallying back toward its highs," says Yamada. "The question is whether we are going to see things break out through those highs. A failure could just mean more time going sideways and that is OK."
Contrarians take note. A month ago, Yamada would have said a failure means these stocks were experiencing mere "kickback" rallies, or just opportunities to run up prices and take profits.
Yamada admits to feeling anxious about embracing the market rally fully, and says the analysis will be clearer after the midterm elections.
Barry James, president of James Investment Research, which manages about $1.8 billion in mutual funds and private accounts, also recently rolled over into the bullish camp. James says his 100-indicator model was negative through the summer and just turned positive, a shift that in part depends on the election cycle. The fourth quarter of this year through the third quarter of next year, he says, are historically good for small and midcap stocks. James also notes that his research shows that a
gridlocked government after a period of harmony is a "prime time" for small-cap stocks.
"It doesn't necessarily mean straight up, but this quarter looks pretty good," he says.
Contrarians might also be interested in the following tidbit: Marc Faber, a.k.a. Dr. Doom, recently revealed he's been buying U.S. industrial and tech shares after having previously shunned U.S. stocks for years.
Lastly, MarketVane's measure of sentiment on S&P 500 futures has reached 73% bullish, a 24-month high. The AAII survey shows 54.2% bullish sentiment through the week ended Wednesday, its highest level since May 11.
Hmm, May 11 ... we all remember what happened to the stock market in May.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click
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