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Is This Unstoppable Rally Finally... Stopping?

|Includes: AMZN, Microsoft Corporation (MSFT)

Another modest trading week is wrapping up -- what better time to take a look at the market?

Last week, I told you that the market we're in strongly resembles the unchecked rally that we "enjoyed" between March and early June. This latest leg has already pushed the S&P 500 up 15.2% since mid-July, though it's finally starting to waiver:

Since the beginning of August, the S&P (a proxy for market at large) has been tracking sideways, and potentially consolidating. Consolidation is a good thing for the market. It gives the market a chance to cool down from quick gains, it provides the opportunity to form a base of support (a price level that the market has trouble falling below), and more fundamentally, it gives investors a chance to take a breather and rethink their market positions.

But a sideways market doesn't always mean that consolidation is occurring.

Just as often, it's the sign of a reversal -- and the last chance to get out of stocks before a significant drop. On the daily chart above, you can see that a base is forming for the S&P 500 around 992. But there are three red flags as well: the August 11 bounce off the trend-turned-resistence line, declining aggregate volume, and bearish MACD crossover.

These three things don't guarantee that the market's set for a fall, but they should give pause to the perma-bulls who are scooping up stocks right now. If we continue to track sideways -- or better, break back up through that upward blue trendline, we will have a very strong reason to believe that this rally will continue for at least several hundred more points. Until then, be very cautious.

Do Fundamentals Matter?

Many investors are wondering what matters in this market -- fundamentals (like earnings and inventory turnover) or technicals (like the chart above). The answer is both.

Scores of investors and traders have been making money in this market -- even now. And for the most part, Rhino Stock Report readers have been doing even better (i.e. a 35% average closed gain). It's hard to go wrong by choosing companies with solid fundamentals during strong market cycles. So that said, let's look at the other half of this equation:

Markets: The S&P and Dow are up 2.6% and 2.5% respectively, despite mixed economic data. That's proof that investors big and small are turning bullish in bigger numbers -- and according to the latest investor sentiment numbers the bulls have grown their ranks by 13% in the last three weeks.

Economy: The economy is getting better according to the Fed. And in the latest quarter France and Germany -- Europe's two biggest economies -- actually grew. Across the world, things appear to be getting better, unless you count the fact that U.S. government reported a record YTD budget deficit in July -- a full three times larger than last year's record deficit. And we've still got two months to go...

Earnings: We're at the tail end of earnings season for Q2 2009 right now. And most of our companies posted strong numbers. A few big names like Microsoft (NASDAQ: MSFT) and Amazon (NASDAQ: AMZN) missed earnings, but on the whole this quarter has rung in as a success to investors. Does that justify seeing the S&P 500 20% higher in the next six weeks? I hate to say it, but probably not.

Disclosure: No positions