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Busting 3 myths on why the U.S. stock market rally can’t continue Add to ...

Concerns are growing with every record tick higher in the U.S. stock market that equities are getting overheated and setting up for a fall.

But Canaccord Genuity analysts Tony Dwyer and Michael Welch are out with three myth-busting points that they think prove the bull market still has legs.

They are a particularly optimistic bunch over at Canaccord. Their target for the S&P 500 is 1,955 - which implies a greater than 15 per cent gain from current levels. And they are assuming the Federal Reserve won’t start tapering bond purchases this year, given that economic numbers just aren’t that strong enough and core inflation remains low. That’s despite more common thinking that the end of such quantitative easing measures will start to be phased in as early as September.

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“Bottom line: we continue to urge investors to not fight the Fed or the tape, and with the uptrend in place, the economy in the fundamental sweet spot, and the SPX trading at less than 15 times our conservative 2014 (earnings) estimate of $115 (U.S.), our conviction level for SPX 1,955 remains high,” the Canaccord analysts said in a research note today.

Here’s what they have to say about three market beliefs they see as myths.

“Myth: The equity market cannot keep going up with such weak top-line growth and peak in margins.

Reality: Top-line growth for the S&P 500 (excluding financials) was at or below the current year-over-year growth rate at this point in the recovery in both the 1980s and 1990s non-recession valuation expansion markets. Historically, after-tax profit margins historically peak after an inversion of the yield curve. Given current Fed statements, that is highly unlikely for years to come. Busted!

Myth: The market is already up too much and overbought, and it is too late to buy.

Reality: The S&P 500 (SPX) is in fact overbought using our trusty 14-week stochastic indicator, but such an extreme has led to a continuation of upside. Looking back to 1982, when our favoured indicator has moved from below 50 to 95, it has led to an additional median gain of 5.32 per cent over 15.5 weeks prior to the next 5 per cent correction. Busted!

Myth: The US Treasury yields can only go up from here.

Reality: While anything is possible, the 10-year US Treasury (UST) yield remains in a downtrend, is historically overbought and has begun losing momentum. While we do expect a lower UST yield ... we anticipate a move lower in yields toward 2.25 per cent would create a final low to be in place – similar to the 2004 retest of the 2003 low in the UST yield. Busted!”

Follow on Twitter: @eyeonequities

 
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