The First Healthy Market in Years?

The S&P 500 has hit its highest level since the crisis began over the past few trading days. U.S. 10-year yields have climbed back above 2 percent for the first time in months. The VIX, the CBOE Volatility Index referred to as the fear gauge of the market, recently probed multi-year lows. So, is this a healthy market?

Well, all signs point to yes as of now. As the chart below shows, bond yields of ultra-safe nations such as the U.S., Canada, and Germany are at or very near to 6-month highs. This is a positive sign showing that money has flowed out of ultra-safe securities and into riskier assets, such as stocks, commodities, with WTI oil approaching $100 per barrel, and risky currencies, as the EUR/USD climbs to 13-month highs.

Further, positive signs emanate from crisis-stricken peripheral European nations. Earlier this week, deposits data showed that money began to flow back to nations such as Greece, Italy, and Spain, and out of nations such as Germany. These flows are reversals of the flows seen during the heights of the crisis, when money flocked from banks in peripheral nations to those in safer, more secure nations.

Further, the market has risen even with its key leader of the post-2009 bull market, Apple AAPL, falling nearly 30 percent after making a new all-time high. By showing resilience even without the leaders, this market could be the healthiest in years.

Proponents of the Dow Theory would look at the Dow Transports Index as a key indicator of a healthy market as well. Indeed, the Transports have outperformed the regular Dow Index over the past three months. In fact, the Dow Transports Index has risen approximately 14.5 percent in the past three months while the Dow Jones Industrial Average has risen a mere 6.12 percent. Thus, the health of transportation stocks, based on the Dow Theory, shows another level of strength in this market.

One negative against the recent rise in stocks is that many of the best performing stocks have been those that were severely beaten down over the previous market swoon. Over the last six months, shares of Research in Motion RIMM, now known only as Blackberry, have gained 90.59 percent while shares of Nokia NOK have gained 88.48 percent in the same period. Even Facebook FB, following its IPO debacle, has risen 34.95 percent in the same period.

However, economic momentum has slowed in recent weeks and could be the first headwind to this market. The Citi Economic Surprise Index, a measure of how strong or weak economic data releases are relative to estimates, peaked just around the new year. Since then, the Index has fallen from near 50 into negative territory. The last time the Index went negative was at the end of April/beginning of May 2012 when markets topped.

Therefore, there are underlying strong fundamentals of this market. Positive money flows out of ultra-safe securities and into riskier assets is a positive. The Fed and global central banks as a whole have only loosened monetary policy further over the past few months. Corporate earnings have been relatively strong, especially from economically sensitive industries such as the rail companies. However, broad economic momentum is slowing and valuations are beginning to become stretched.

This market is definitely healthier than market rallies we have seen in past years. However, there is the possibility that, to quote Bob Dylan, the times they are a changin'.