A time for caution and enthusiasm

**first published on http://www.realmoney.com 7.25.16**

 

The S&P 500 closed Friday at 2175.03, a new, all-time high close. Even though it was a low-volume summer day, there is still much to learn from it — and all of last week’s market action.

With a market that keeps pushing to new highs without a decent pullback, there is as much cause for concern as there is for enthusiasm. As bullish as I am about the market — and the U.S. economy in general — I would be remiss in my duties as an analyst to not sound a note of caution here. As the saying goes, no one ever went broke taking profits.

With that said, I still believe that markets will trade higher from here, but there will be a period of consolidation. This consolidation will be a healthy respite that allows the major indices to form a technical base for the next move higher. The market has had a great run since the February lows, and the pieces are in place for another run higher, but it won’t be a straight line up.

Last week’s market action was encouraging — in part because we finished at an all-time high, but more because of how equities reacted to external factors. Even with the macro uncertainties of the Turkey coup and a near 5% drop in oil for the week, equities managed to trade off of the positive earnings and economic news we received in the U.S.

So far this earnings season, we have had great reports from significant names across a wide range of industries. One company that reported excellent earnings last week, which did not receive enough attention was Cintas Corporation (CTAS) . Cintas is a service provider to the services and manufacturing industries. Its primary business unit provides uniform rentals and facilities services to automotive, health care, education, food services and gaming businesses, amongst others. Facility services include the cleaning and upkeep of properties, air ventilation maintenance and providing towels and safety mats for shops and restaurants.

Cintas just reported fourth-quarter earnings, which completed a record year in terms of revenue and earnings per share and also raised its guidance for next year. Fiscal 2016 sales were up 9.6% from 2015 while net income was up 15.1%. With 2017 revenue expected to grow at least 5% and a current market cap of $11.2 billion, we are looking at a large-cap name with solid growth prospects. The key takeaway from Cintas’ strong performance is that it is a direct reflection of the health of the U.S. business environment.

On the economics front last week, we had the most-comprehensive housing market data point there is: existing home sales (EHS). As the National Association of Realtors note, EHS account for roughly 90% of total home sales, and are currently on their best annual pace since February 2007.

This is significant, because of the drastic difference in lending standards between pre- and post-housing-crisis lending. Before the housing crisis, lending standards were very lax and sometimes almost nonexistent for some borrowers. These irresponsible lending standards led to a sharp increase in home sales — and ultimately the collapse of the housing market.

Today’s lending standards are very stringent, which makes the high level of home sales that much more impressive. Now we actually have a housing market that is based on qualified borrowers, and is thus sustainable. Our housing market is running on both a high quality and quantity of transactions. Strong EHS data is also another reflection of the health of the U.S. economy — and further justification for this bull market to keep going.

Now we head into one of the most important weeks for earnings data. We are getting reports from tech and retail heavyweights like Apple (AAPL) , Facebook (FB) , Alphabet(GOOGL) and Amazon (AMZN) , among a whole slew of industrial and health care names.

For Apple, market consensus seems to be expecting bad news stemming from slowing device sales. We could certainly see that, but I’m expecting to see a pickup in their services-based revenue, which help makeup the “Apple ecosystem,” to offset that decline. In general, the market is pretty much priced for perfection, so any slight miss from some big names will probably give us the consolidation period we are looking for. There is also plenty of economic data to look forward to this week, with the FOMC meeting, ending on Wednesday, getting the most attention.

While a rate hike is warranted when looking at how the economy stands, it’s a rather unlikely possibility. With that said, let’s see what Mr. Market brings us this week.

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