Looks like ‘all-clear’ signal given for stocks

By Bryan Rich

May 11, 3:00 pm EST

Over the past two Friday’s we’ve stepped events and conditions that have built the case that that “all-clear” signal has been given for stocks.

We are 91% through S&P 500 earnings for Q1 and the positive surprises have continued to roll in, on both earnings growth and revenue growth. Q1 GDP growth had a positive surprise, to reflect an economy that is running very close to 3% over the past three quarters.  The important FAANG stocks all beat on earnings and beat on revenues for Q1.  And the big jobs report last Friday did NOT come with a hot wage growth number, which keeps the inflation outlook tame.

Now we have very compelling technical confirmation that a resumption of the big secular bull trend for stocks is resuming. This correction has given everyone a long time to get on board.  But it looks like the train is leaving the station.

Here’s a look at the S&P 500 ….

This bull trend in stocks from the oil-price crash induced lows of 2016 remains intact.  The trendline tested and held three times in this recent correction, as did the 200-day moving average.  And yesterday we had a big break of this trendline that represents this correction of the past three months. This has been textbook technical confirmation of a price correction within a strong bull trend.

Here’s the Dow chart we looked at on Wednesday …

And here’s the latest as we end the week, as the momentum from that trend break continues …

U.S. stocks are being valued right at the long-term P/E, at about 16 times forward earnings.  Stocks in the UK, Germany and Japan are all trading closer to 13 times forward earnings.  That’s cheap relative to long-term averages, and especially cheap (including U.S. stocks), in ultra-low interest rate environments.  For perspective, Japanese stocks are recovering back toward the highest levels in more than 25 years, yet the forward P/E on Japanese stocks is closer to the lowest levels over the period.  Stocks are cheap, and this correction has been a gift to get all of the onlookers on board.

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