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Shares growth greater, however merchants have a more durable time making a living

Trader on the New York Stock Exchange.

Source: NYSE

This is a very strong rally. The combination of surprisingly strong economic reports and still surprisingly strong earnings reports is bringing large parts of the US stock market to new highs.

The technicians are also impressed.

"The vast majority of NYSE stocks are in medium-term uptrends, regardless of short-term setbacks and volatility," wrote Michael N. Kahn of Lowry Research, the oldest technical research company in the US, in a press release to clients.

Of course, the market hit new highs in January and February, but this time it's different. Earlier new highs in January and February were greeted with a tweak: It was mostly big-cap tech stocks that drove the markets higher.

Not this time.

The rally has expanded, great. Far more stocks rise than fall. Almost a quarter of the stocks in the S&P 500 and NYSE Composite Index are at new highs. More recently, laggard groups like utilities, healthcare and REITs have outperformed previous leaders like technology and industry.

The value is at a new high. The growth is at a new high. Big caps reach new highs, midcaps new highs. The small-cap Russell 2000 is slightly behind, 4% below its high, but nobody seems to be complaining too much.

The good news is that big advance is bullish for the markets.

The bad news is – well, traders aren't sure what the bad news is or if the old rules even apply.

Everything goes up

A feature of the market this year is that when one sector (like technology) is lagging, other sectors (like energy, banking, or industrial) will continue to rally, keeping the S&P on an uptrend for the most part.

But now everything is going up.

"The net of it all is that against the dazzling tech numbers it was difficult to lose money, at least a lot, but not as easy to make," Frank Gretz of Wellington Shields said in a note to customers who note, that it is difficult as a trader who switches in and out of stocks to make money when everything is going well: "Now only the S&P 500 is running consistently."

That sounds like a strange problem: We no longer have any places to turn to. But it is a serious problem for active traders.

"There is no longer a Covid discount," said Peter Tchir, Head of Macro Strategy at Academy Securities. "There's no obvious sector where it looks like the rest of the market has ignored the space. I'm not sure if we should just be 50% cash and just figure out what's in the next one or two Weeks is mispriced. "

The result will be the great test

The market is now facing a very large group of stocks – not just technology names – that are rising fast and that expect earnings to rise quickly. And this is where the resistance can begin.

"Most companies don't respond well to profits," said Alec Young, chief investment officer at Tactical Alpha, noting that bank stocks moved little last week, even though profits were well above expectations. "Stocks are doing well in terms of earnings. What I don't understand is whether they can maintain momentum once earnings are reported."

The Fed problem will return

Then there is the Fed problem – with economic growth well above expectations, it is only a matter of time before the Fed becomes an issue, as it did in February.

"Investors want it both ways – they want strong growth, but they don't want the Fed to rejuvenate (buy bonds)," Young said. "The Fed is not going to be on its hands with this kind of growth; it will at least have to rejuvenate," Young said later this year.

Tchir agrees, noting that prices have moved so quickly that there is likely to be something.

"We have priced in great economic growth, moderate inflation and a belief that returns are under control," said Peter Tchir, noting that recent reports that the Japanese bought US bonds helped boost bond yields reduce. "If one of those legs gives way, we'll have a retreat."

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