While many investors would like to think that fundamentals determine stock prices, the unpleasant fact about the stocks is that momentum is a powerful force in the market that can carry stocks far above or below intrinsic value.

IN PICTURES: 8 Ways To Survive A Market Downturn

Momentum is part of the reason the market has rallied so hard since the bottom in March 2009, and why so many investors see a puzzling disconnect between the level of stock prices and fundamentals.

The percentage of stocks in the S&P 500 trading above the 50-day moving average is at 80% through April 29, 2010, according to Bespoke Investment Group. This is down a little from the 93% reading a few weeks ago, but is still a strong momentum indicator. Consumer discretionary stands at a level of 90% of their stocks trading at 50-day highs, while health care is at the bottom with 52%.

Earnings season so far to date is also pumping up stock prices, as 63 of the 575 companies reporting earnings have raised guidance compared to only 12 lowering guidance.

Guidance On The Rise
iRobot Corporation (Nasdaq:IRBT) was one of these companies raising guidance on earnings and revenues, and expects 2010 revenues to be in a range of $375-85 million, compared to consensus estimates of $353.5 million. Expected earnings were also moved higher for 2009, to a range of $0.35-0.40 per share compared to consensus estimates of $0.23.

Baidu (Nasdaq:BIDU) also raised guidance when it reported first quarter of 2010 earnings report. The company now expects revenues for the second quarter of 2010 to be in a range of $268.1 million to $274 million, up from the current consensus of $240 million.

Wall Street strategists have also moved up year-end price targets for the S&P 500 over the last few weeks, providing another tailwind for the entire market.

UBS AG (NYSE:UBS) has the highest price target for the S&P 500, at 1350, with strategists at Deutsche Bank (NYSE:DB) and JP Morgan (NYSE:JPM) at 1300. The current level of the S&P 500 is at 1187. (L8)

Some of the lowest price targets are from strategists at Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C), which are at 1200 and 1175, respectively. Even the most pessimistic forecast from Citigroup, if realized, implies a 5.4% yearly gain for the market.

The Bottom Line
It would be nice to think that logic and reason set the value of assets in the open market, but deep down the forces of momentum can quite easily over power fundamentals. Investors should remember that this momentum could cut both ways, and shift rather quickly against them. (Thinking about a career in investment banking? Check out Top Things To Know For An Investment Banking Interview.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  2. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  3. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  4. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  5. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  6. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  7. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  8. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  9. Investing Basics

    4 Iconic Financial Companies That No Longer Exist

    Learn how poor management, frauds, scandals or mergers wiped out some of the most recognizable brands in the finance industry in the United States.
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center