Editor’s Note: The following was written by Yahoo Finance Contributor Milanee Kapadia. You can follow her on Twitter @MilaneeKapadia
On Friday, the SP 500 (^GSPC) finished at 1,988.40 after fluctuating near an all-time high. Investors were focused on tensions in Ukraine and were taking in comments on monetary policy by Federal Reserve Chair Janet Yellen.
The benchmark index is 10 points away from the 2,000 mark after a booking a nice week of gains. Three rounds of Fed stimulus and strong corporate earnings has helped the SP almost triple since its low back in March 2009.
But how much further does this five-year old bull market have left? Nick Colas, chief market strategist at ConvergEx Group says he has a three-point checklist to gauge where the market is headed.
First off is the yield on the 10-year Treasury note (^TNX). Colas calls them the Teflon security of 2014 as they’ve surprised to the downside. He was expecting rates to rise up to 3% as they did at the end of 2013, instead they’ve stayed firmly planted around 2.5%. Colas says “that’s been good for valuations and for money flowing into the market but we need to see rates rise to validate the notion that we do have a recovery going on underway and inflation is going to pick up modestly.”
Second is news flow. Colas is keeping an eye on the stream of earnings and economic announcements. The last quarter showed strong top line and bottom line growth and he wants to see a continuation of that trend in the back half. His target is 8-10% for earnings and 2-3% for GDP. This follows on the heels of second quarter GDP coming in at 4%.
Finally, Colas focuses on asset correlations, i.e., how stocks move together during a financial period. The lower the correlation, the more money investors can put into the markets. During the depths of the financial crisis correlations were extremely high– around 95%. He says “asset price correlations for sectors in the SP should be 50. The good news is that we’re back down closer to 70% and even the pullback that we had recently only got us back to 75. So we still have some room for correlations to go down for asset owners to put money into U.S. equities.”
If investors can move beyond the Fed and interest rate fears, Colas predicts correlations should come down further.
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