Global Equity Markets Rally; The Market is Climbing the Wall of Worry

Summary

  • A huge global equity rally is under way following the first round of the French election.
  • U.S. stocks also rallied. The NASDAQ index surpassed the psychologically important 6000 level for the first time.
  • New sector breakouts can provide “catch up” trade opportunities.
  • Geopolitical and domestic conflicts can derail the global rally, but so far the markets are climbing the “wall of worry”.

 

In our previous blog post, we made a bullish case for the equity market. The global rally did indeed start yesterday after the results of the first round of the French presidential elections were announced, as traders placed bets on a market-friendly outcome of the final election in early May.

The French stock market rallied strongly in response to the election results on Monday and today. What’s even more interesting is that the volume of the iShares MSCI France ETF (EWQ) spiked on Friday before the results were announced:

ewq-042517.png

 

The rally spread to almost all international markets, including emerging markets:

fdivx-042517.png

femkx-042517.png

 

U.S. stocks rallied, as well, with the S&P 500 index breaking above the downtrend line decisively:

spx-042517.png

 

The Nasdaq index, which is primarily driven by growth companies in the technology sector, broke above the psychologically important 6000 level today.

Why is this level important? Many investors remember breaking the 5000 level at the peak of the dot-com bubble in 2000. Valuations are much more reasonable today, but it is amazing that it took 17 years for the Nasdaq index to make the next milestone, after moving above the 5000 level last summer:

nasdaq-042517.png

 

The technology sector continues to lead the market, but the rally is broad based. A new development is that Health Care sub-sectors are moving higher in the momentum ranking:

Momentum_Screen_042517jpg.jpg

 

The materials sector is also strengthening. The new breakout for the Fidelity Select Chemicals Fund (FSCHX) represents a “catch up” opportunity to participate in the rally:

fschx-042517.png

The Fidelity Select Health Care Fund (FSPHX) has also made a new high:

fshcx-042517.png

 

Books describing the history of the stock market are filled with examples of the markets climbing the “wall of worry”. This expression refers to situations when equities advance, in face of known and real dangers that can derail the advance.

It seems that the current market environment is not unlike of the historic examples. Heightened geopolitical tensions on the Korean peninsula and in the Middle East, ongoing budget ceiling negotiations in Washington, trade disputes with Canada, and unexpected earnings surprises can negatively impact market sentiment within a short time.

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