Why This Rally Should Continue

Since the Nasdaq has been the index that has lead this rally I think it’s important to focus on it for clues as to whether this rally will continue. A few things I’m noticing that makes the case this parade will continue is when you view the Nasdaq on a 30 min intraday one can see a reverse head and shoulder pattern that just broke to the upside with Friday’s late day burst. While it’s by no means a perfect pattern, it does speak of consolidation and a continuation move higher.

This next chart shows something very important going on behind the scenes. The percent of stocks moving above their 200 day moving average is approaching pre-market meltdown levels. This internal momentum of individual stocks could push this index much higher than I ever thought possible, maybe even to its falling upper trendline, around the 2100 level. This is not a prediction as I’ve been a stubborn bear for far longer than I needed to be, but it’s one possibility that should be considered.

What’s interesting is should this target be met, it would be an 18% incline. Assuming the Dow would move at least that same amount, that would have the Dow stalling right around the 10,000 mark, which is exactly the psychological barrier one would expect a key reversal to occur. I’m sure at that point not a short would be left anywhere. Food for thought….

Comments

[Dave Wrixon:]

Much depends on the availability of cheap smack. If the price of that goes up then S&P could easily hit 300 this Summer.

May 31 06:59 AM

[sorgmot:]

USA common stock market indexes are in bob sled runs down the mountain. Down she goes and where she ends, no one knows.

We are looking for a steep slide in there indexes stating in June 2009 and ending in March 2010 with a bump up in November of 2009.

The mighty Casey came to Washington DC, and first came to bat in January 2007. He (she) whiffed in 2007 and whiffed again in January 2008, and whiffed yet again in January 2008. Back to the dugout went Casey. Game is over and lost.

Is the USA war in the middle east over yet? No.

Has the USA stopped loosing skilled fobs yet? No.

When will Casey return to the minors?

May 31 10:53 AM

[surgcare:]

I feel sorry for who ever has been buying stocks and even more afraid for those who are about to buy more .However they have no one to blame but themselves for listening to the government and media .

May 31 11:17 AM

[Donald Ingram:]

Friday's late day burst smacks of manipulation when you look at the volume involved. As one pundit mused, it would take upwards of $10 billion to move the market that amount. Who has that kind of money? Why would they do that? The basic fundamentals DO NOT support such a move in the markets. Beware of an ulterior motive that is occuring behind the scene.

May 31 12:44 PM

[RTF 360:]

Why a target of 10,000 ?
Over 7,000 DOW points lost since the 14,000 top
3,500 DOW points for a half way back reteacement.
6,500 low on the DOW PLUS 3,500 = 10,000. No brainer.

It'll print 10,000 much to the chagrin of conspiracy theorists for the simple fact of share leverage.

The question you want to ask, "Do I squander this last chance at share leverage after destroying resistance for the past 48 trading days ?"

Equities are safer than Oligarchy Bankster Treasury Bonds.

The TRUE flight to quality is equities over Treasuries.

May 31 01:31 PM

[TradingHelp...:]

"For some weeks now we this weekly review has 'called' Q1 or Q2 2009 as the trough of the economic cycle. Initially there was much risk in the statement as the global and US recovery was by no means certain, but as the weeks have progressed the ongoing stream of economic data has increasingly supported this view. The consensus among market commentators has also moved towards our more optimistic pro-recovery stance and now a Q3/Q4 recovery is a mainstream prediction, rather than the hopeful rhetoric of the enlightened minority. Our view did of course fully consider the unusually bitter and sharp contraction in growth primarily caused by very poor leadership in the global banking sector, ineffective regulatory risk controls and appalling credit procedures in the mortgage and commercial lending market place. But whilst we accepted this scenario as depressingly and worryingly unique in modern times, with only the depression of the 1930’s having close similarities, we also reflected on the impact of the unprecedented wall of money flooding into the global economy via government and central bank stimulus packages and its effect on demand. The global economy has never enjoyed such internationally co-ordinated monetary easing or the simultaneous hard–cash injections by governments, to shore up the balance sheets of strategically important institutions. The consequences of this combined stimulus are already being seen in the price of commodities, including oil and gold. Looking beyond the current market-wide inflation data which does not yet fully reflect improving demand outside of the resource sector, we predict that deflation will not only fade from the vocabulary of pessimistic US economists, but that concerns over inflation will return with vengeance within 18 months."

May 31 01:51 PM

[David White:]

Here are a couple more things to think about. First the driving force fo this rally was initially financials. They moved up dramatically. This may have even been an orchestrated move by companies such as GS, so the banks, etc. could raise capital (sell their stock and bonds) at higher prices. In this way there would be less dilution. This move up has petered out lately. Meredith Whitney has said she doesn't want to own financials at these valuations. Other prominent investment figures have made similar comments. The XLF 20-day SMA is close to meeting its 200-day SMA. It may very well retrace from here.

Second Barron's has recently estimated the PE of the S&P500 after Q1 is about 123x. Ockham Research has estimated the PE of the S&P500 at about 46x. Both of these figures are extremely high. The economy hasn't even stopped contracting yet (that I know of -- -5.7% GDP growth). Recently the Fed estimated unemployment to stay at or above 9% through 2010. We seem to be heading to over 10% by the end of this year. This does not sound like a high growth scenario to me. Logically the market cannot sustain such high a valuations in the face of negative to slightly positive growth prospects for the next two years. Recovery will be slow. Clearly this market has been rising on emotion. Perhaps there is more reason to hope in technology stocks. However, it definitely seems that these markets are overbought for the near term.

Perhaps the market emotion can carry the DJIA to 10000 in the next couple of months. I am almost never completely surprised by anything the markets do. However, sanity argues that the markets are headed for a near term retracement. The SPY is just hitting its 200-day SMA on the way up. It may bounce off. Institutions have sold 182M shares (net) of SPY in the last 3 months (Reuters). The SPY has been under distribution since the end of the first week in may. The volume in SPY has decreased dramatically since March. All this tends to argue that a retracement is in the cards for the near term. Perhaps GM entering bankruptcy will be the trigger for the sell off???

Admitttedly the nasdaq has been stronger. The 20-day SMA has already cruised through the 200-day SMA for QQQQ. However, the 50-day SMA is now approaching the 200-day SMA line for QQQQ. This could be a point at which the QQQQ decides to turn down. The Money Flow Index does show money slowly moving out of QQQQ. This is not the sign of a strong market.

May 31 03:03 PM

[thiazole:]

Yeah, it sure is tough being long in this market - with all the money we are making, our taxes are going to be hell next year. We really do envy the bears and the capital losses they have on their short positions - no, really we do... ;)

Let me guess - you've been expecting the market to crash for months now but have been wrong so far, yet you are sure this time it will be different? Good luck with that! I do agree that the market will eventually crash - as soon as the "me too bears" turn into "me too bulls". I'm guessing May 2010?

On May 31 11:17 AM surgcare wrote:

> I feel sorry for who ever has been buying stocks and even more afraid
> for those who are about to buy more .However they have no one to
> blame but themselves for listening to the government and media .

May 31 04:25 PM

[thiazole:]

I thought everyone got the memo that index P/E ratios are meaningless in this economy? You can't have a negative price to offset negative earnings for individual companies. Are you saying that a super profitable company should be worth less because it shares an index with a company that is losing money?


On May 31 03:03 PM David White wrote:

> Second Barron's has recently estimated the PE of the S&P500 after
> Q1 is about 123x. Ockham Research has estimated the PE of the S&P500
> at about 46x. Both of these figures are extremely high.

May 31 04:30 PM

[tc1:]

The big question here is not WHETHER a correction to the markets' huge recent rally is coming soon, but by HOW MUCH will it correct?

The really bearish folks think the March 9 lows will be retraced, retested and maybe even broken through to "Dow 5,000"-- which is about the lowest number it can go to mathematically, because no one sees most nonfinancials like McDonalds et al. as going bankrupt. (Not sure what the ultra-bears think in terms of how far down Nasdaq and S&P will go).

Other prognosticators think we'll only experience a 6-12% correction (e.g., Dow down to 8000 or 7500). That is more reasonable to me, and contemplating the latter figure has leads me to cash in several positions in hopes of re-buying the same positions at a discount later.

One big thing to remember here is, just as irrational exuberance pushed the Dow up to 14,000 in Oct 2007, so also irrational pessimism is likely the culprit that pushed it all the way down to 7,552 in Nov and 6,547 in early March.

Many see the recent astonishing rally as really not so astonishing, but simply a strong "upside correction" to the irrational pessimism that plunged the markets to their 10-13-year lows. As one author put it, it's like the market was a coiled spring that was pushed far, far down by fear-- it has to rebound up sharply and suddenly if a bit of the "fear" pressure is relieved.

IMO, a likely healthier trading range for the markets over the medium term and "near-longterm" (3-5 years) period might be 8,500 to 10,500 for the Dow, with Nasdaq coming back a bit higher in its comparative trading range.

This would most definitely NOT be a buy and hold/hope market, but one for taking frequent profits on the high side and rebuying at a reasonably lower side, without hopes that one can perfectly time any of this.

May 31 06:11 PM

[thiazole:]

There is another alternative that may be interpreted as more bullish OR more bearish than a mild 6-12% correction (I say more bearish), and that is that the market stays in its current holding pattern for another 4 months. If you think about that worst case scenario being that it retests the bottom, it would probably spend 2 months going down and 2 months coming back up, so we would be in the same place 4 months from now. In the 6-12% correction scenario, it drops for maybe 2 weeks to a month, then comes back in about a month, so that is much more bullish than getting stuck in a holding pattern.


On May 31 06:11 PM tc1 wrote:

> The big question here is not WHETHER a correction to the markets'
> huge recent rally is coming soon, but by HOW MUCH will it correct?
>
>

May 31 07:14 PM

[a. palmer jr.:]

You could still pick up stocks for $2 a share and sell them for $4 or $5, what's wrong with that?

May 31 10:17 PM

[Steven Vincent:]

I agree that the NDX is a leading indicator. But keep your eye on the SPX...it is about to hit major cluster resistance in the 950 area which should initiate a wave of selling back down to 900. If the 900 level holds then we probably have a full on bull market on our hands. If not then we may see a downtrend commence.

For a complete analysis check out: Jesse Livermore said (paraphrasing): Don't look for the reason a move is happening, just follow the trend...the reason will present itself in due time.

Friday's move happened because bears who tried to short the May top have seen support hold as bull buy any dip that presents itself. On Friday the May consolidation triangle broke to the upside, leading to a short covering rally by nervous, frustrated bears. It's as simple as that. And the bears will get squeezed well this week up to about SPX 950 where there is significant techincal resistance.

For some in depth analysis, please read: seekingalpha.com/artic...

May 31 10:56 PM

[FrankLive:]

Gold had a nice head and shoulders pattern and nicely overcame that problem.

Remember June 30, 2008 when stocks (esp. commodities) were sitting pretty. Then came July 1, 2008 and they plummetted well before the average investor thought there were extreme problems in the markets.

Where is the money we are all suppose to have to invest? The government / rich uncle hasn't sent me my check yet. If they did, I would have to spend it on food and gas. My family already owns six computers, five cell phones, three big screen tvs, three cars, and we have new appliances and furniture. Anyone else going to buy this stuff or are you where we are? I have concluded that to get the country rocking, we all have to buy a second home and double our debt. We're not going to do that. Are you?

Jun 01 12:06 AM

[Bill49:]

On the other hand, Goldman Sachs SLP program appears to have access to unlimited funds to continually "goose" the market (witness Friday's parabolic final minutes of trading). I cannot help but think that the Fed's electronic printing press is hardwired into GS quants for politcally motivated quantitative easing. If that is the case, the market will go wherever Bernacke and GS want.


On May 31 11:17 AM surgcare wrote:

> I feel sorry for who ever has been buying stocks and even more afraid
> for those who are about to buy more .However they have no one to
> blame but themselves for listening to the government and media .

Aug 03 04:02 PM