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Sunday, April 25, 2010

Market Thought... confirmation

Friday's close was confirmation of what I was seeing intraday. The SP500 started to breach major resistance.

Next week could provide a breach, and a few scenarios can play out:

1. We breach upward, then consolidate around the weekly SMAs (the 200 and 320). After the consolidation we continue to march upward.

2. We reach the 200SMA, then the SP500 corrects to around 1150 or so. After the correction, the market can continue to march upward.

The fundamental story here can potentially support both, but I want to lean toward #1 (despite me taking on some protection on Friday afternoon). Here is why:

First, the market is not overvalued. With earnings as strong as they are, this is simply not the case. Even AAPL is not as bad as one would think. Growing earnings at +25%, with a trailing PE of 23 or so, is very reasonable. (Don't even get me started with other names like IBM, F etc.)

Second, the economic story is very much intact. The jobs numbers will prove it. (If anyone wants a forecast of jobs growth look at the chart of MWW, and the job index they provide. Its very telling.)

Third, potential avenues of uncertainty or 'black swans' are diminishing, along with their potential effects. There are a few that will cause things to hick-up, but we are at a wait-and-see thesis...

1. The Euro mess: From Greece to the rest of the PIGS. IMO, the real threat here is social unrest, and an overthrow of the current governments causing a shock to global trade. But the situation is not at that level yet.

2. Higher Interest Rates: At best this will be a short-term short to markets. Higher economic growth goes hand-in-hand with higher interest rates. And the players know this. The Fed keeps their language, but I would not be surprised to see market teasers like we got earlier this year with the Fed window rate hike. So that the market eases into this expectation.

3. SEC sues everyone: Think GS' fight will cause a subdued reaction to others being sued, but none the less, it may have an affect considering how much GS sold off (and is still off) on the news.

Updated 042610 - forgot to mention a 4th uncertainty: China's bursting of the real-estate market. This should have an effect on basic materials, but their stimulus package is geared toward infrastructure build. Outside the scope of residential. So this may mitigate some risk there. But this is a real threat none-the-less.

The market needs a healthy consolidation, its just a matter of how it consolidates.

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