Stock Market Fake-Out: Where Is the Retrenchment?

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Submitted by Abby Joseph at Profit Confidential as part of our contributors program.

This is unbelievable.

Johnson & Johnson (NYSE/JNJ) jumped about 23% since the beginning of the year, not including its dividend payment.

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This upside on the stock market from such a mature brand is striking. And here’s the thing: the company actually delivered with its earnings results.

Companies like PepsiCo, Inc. (NYSE/PEP), Kraft Foods Group, Inc. (NASDAQ/KRFT), Colgate-Palmolive Company (NYSE/CL), The Walt Disney Company (NYSE/DIS), and even McDonalds Corporation (NYSE/MCD) performed similarly.

I can’t recall a time of such coordinated stock market strength from blue chips.

Of course, the stock market breakout has been all about the safest names. Institutional investors wanted to buy this market, but they needed the earnings safety to do it.

Over the last two weeks, the NASDAQ Composite saw a turnaround from its little slump, based on good earnings news. This broadening of the stock market breakout is definitely necessary for price strength to continue.

Oddly, there hasn’t been a correction yet.

Quite often on Wall Street, when you get groupthink or a group expectation about an event taking place in the financial markets, it doesn’t happen. There has been no correction so far, and this is truly amazing.

Without question, an abundance of caution is appropriate considering where the stock market just came from.

First-quarter earnings season is winding down, and a lot of smaller companies are reporting now.

Companies like LKQ Corporation (NASDAQ/LKQ), Alaska Air Group, Inc. (NASDAQ/ALK), Qlik Technologies Inc. (NASDAQ/QLIK), Global Medical, Inc. (NASDAQ/GMED) and NeuStar, Inc. (NYSE/NSR) reported improved earnings results. (See “Old Economy Auto Parts Stock a Better Play Than Any Tech Stock?“)

I consider the stock market’s trading action and investor sentiment as strong enough to carry this market a little higher.

But I just don’t see how the stock market can advance meaningfully higher in the face of mediocre economic news. While earnings did show improvement in the first quarter, sales were flat.

Clearly, the appetite that institutional investors have to be buyers in this market has some staying power.

While corporations were once again cautious with their earnings outlooks for the rest of the year, I read many outlooks that were generally positive, expecting economic improvement.

Institutional investors must be taking this to heart, and they are buying. Also helping the cause is the enormous cash hoard that continues. Corporate balance sheets, especially among blue chips, are getting stronger.

I look at the performance of the stock market with continued amazement. With the Dow Jones industrials up around 14% year-to-date, it is a breakout.

Making the case for buying blue chips now is tough, although decent second-quarter earnings can move them higher.

I keep waiting for the correction. I’m not rooting for losses, but it is a requirement for the medium-term health of this market.

If there isn’t a correction, this unbelievable action will bust.