The stock market has gained in nine of the past 10 years and is off to another strong start in 2020. Equity investors have been rewarded, but risks remain. Is the stock market’s bullish momentum waning?

With stocks, caution is always in order. This is especially true when it appears stocks are invincible. “It is wise to remember that too much success in the stock market is in itself an excellent warning,” said Gerald Loeb, one of E.F. Hutton’s founding partners.

Let’s examine three aspects of the market to see if the momentum is still to the upside. 

Momentum Stocks

Examining stocks with a momentum bias provides a firsthand view of the bullish epicenter. The iShares Edge MSCI USA Momentum Factor ETF (MTUM) has already gained 7.3% year-to-date and is easily outperforming the total U.S. market by an impressive 3%.

From a technical analysis perspective, MTUM trades safely above both its 50- and 200-day moving averages. So long as it stays above these levels, MTUM’s short-term price action remains bullish.

MTUM concentrates its equity exposure on large- and mid-cap stocks with positive price movement. Stocks are assigned a momentum score which is then multiplied by the company’s market size. Thereafter, the stock’s index exposure within the fund is capped at 5%. MTUM’s top three holdings are Microsoft, Visa and Mastercard.

Sector Momentum

Analyzing industry sector behavior provides us with more insight on the stock market’s general trend.

Among the 11 industry groups within the S&P 500 Index, just two – basic materials and energy – are negative. With the exception of energy, the losses in the Materials Select Sector SPDR ETF (XLB) have been modest and are down just 1.7%.


The energy sector’s problems seem to be a sector specific issue as opposed to a broader macroeconomic problem. For example, Asia’s coronavirus outbreak and the economic shock it’s causing has crushed energy commodities such as crude oil. This in turn has spread to energy stocks, which are suffering.

Aside from the Energy Select Sector SPDR Fund (XLE), which has declined 9.5% year-to-date, bullish sentiment and price action in most S&P 500 industry groups is outnumbering the bears.

Earnings Momentum

Are corporate earnings confirming the stock market’s upward movement?

For the most part, fourth quarter 2019 corporate earnings for U.S. companies within the S&P 500 has been solid. Through the first week of February, reported earnings have been 4.6% above analysts’ estimates, according to FactSet. Moreover, 71% of companires are reporting earnings per share above estimates.


Sector wise, all S&P 500 industry groups have reported fourth-quarter earnings above estimates, led by technology (89%), communication services (83%) and health care (79%).

Summary

Looking ahead, what will be the coronavirus’ impact on future corporate earnings? And will more companies join the S&P 500’s rally? Just four stocks – Apple, Alphabet, Amazon.com and Microsoft – account for 67% of the S&P 500’s year-to-date return through February 7, according to DataTrek Research.

Despite these obstacles, the momentum in U.S. stocks, at least for now, is bullish from multiple angles. The majority of S&P 500 industry sectors are up, with momentum stocks leading the broader market higher. Moreover, the latest quarterly corporate earnings are also strong.

Ron DeLegge is founder and chief portfolio strategist at ETFguide, and is the author of “Habits Of The Investing Greats.”