Cautious But Cognizant Of The Bull Case

I am cautious on the market now that we have seen a large bounce off the early June lows. The economy and earnings are slowing while we are in the seasonally weak summer months. Short term sentiment is on the bullish side but not at an extreme. Despite all these negatives I am not bearish and would not be surprised to see further gains.

Large market participants are positioned conservatively and they have  a lot of room to add if they were to turn bullish. Low rates have income starved investors and retirees venturing into dividend paying stocks, a trend that can continue and even accelerate.

It is very important to remember that the economy is not the stock market. Even assuming that the slowing economy will eventually hit earnings hard, that does not mean the market cannot go higher first. In October of 2007 we were nearly 10 months into the subprime crash,  yet the S&P 500 was making an all time high. The very bullish case is that we are currently seeing the same muddle through growth we have been seeing for years. If this turns out to be the case the market has the potential to go significantly higher.

With the S&P 500 trading at 13 times expected earnings I see little reason to be bearish. But with the economy slowing and numerous imbalances there is a higher than normal chance of an economic accident. As long time readers know I am not scared to put myself out there when I have high conviction. But given all these cross currents I do not have a strong opinion on the market at this juncture.

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