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The core driver of stocks in the latest rally?  -- In my opinion, a move down in the still too high Equity Risk Premium.  The S&P 500 Equity Risk Premium moved from around 6% three months ago, to about 5.3% now. 

Internals in this rally are instructive:

  • I took a look at a Forward 12-month Price/Earnings ratio chart this morning.  It showed stock valuations stretched towards a 14 level on the S&P 500 Index in the latest rally. Still pretty low historically.
  • Consumer Discretionary and Consumer Staples are near one another at around a 16 P/E.  In the latest rally, Discretionary valuations moved ahead of Staples.  Consumer stocks are the growth areas of the economy and are priced as such.
  • With its relatively high free cash flow yield, investor’s search for safety pushed up Telcos valuation.  However, these defensive stock forward P/E valuations came down of late. They are still the highest though.
  • Financials are still the worst in terms of forward P/E ratios.  However, these stocks valuation multiples are among the highest accelerators in the latest rally.  Less fear in financials helps.

Since lowering fear and adding risk is the story of rising S&P 500 stocks, the question I have is this.

First, what LOWER RISK is taking stocks up the MOST?

(A)  A lower risk of a "Fiscal Cliff" meltdown

(B)  A lower risk of a China Hard Landing.

(C)  A lower risk of a European Financial/Debt Crisis.

(D)  A lower risk of a U.S. recession.

(E)  Other

Second, what is the most likely fear factor to REVERSE matters this year?

 

Zacks Releases Their 7 Best Stocks for September, 2014

These 7 were hand-picked from the list of 220 Zacks Rank #1 Strong Buys with earnings estimate revisions that are sweeping upward. Their stock prices are expected to rise sooner than the others.

Today, this Special Report is available to new Zacks.com visitors free of charge.

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Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
PLANAR SYST… PLNR 4.44 +5.21%
BITAUTO HOL… BITA 81.71 +5.12%
CTPARTNERS… CTP 16.66 +4.26%
CHINA BIOLO… CBPO 47.91 +3.30%
MALLINCKROD… MNK 72.94 +2.85%