Breaking Out Is Hard To Do

In last Friday’s market commentary, I talked about the fact that we have reached the upper band of the recent trading range and that a potential break above the S&Ps; 200-day moving average could mean a resumption of the bull market.

This level could also present major resistance and pull the indexes off their lofty levels. Reuters reports more on the subject in “Stocks on brink of breakout:”

Wall Street enters next week on the cusp of a breakout in U.S. stocks, but it will need another spate of convincing earnings reports to feed the rally that sprouted at the end of this week.

The markets endured malaise with poor economic data and downbeat testimony from Federal Reserve Chairman Ben Bernanke on Wednesday but turned decisively after a number of strong results pointed to better times ahead.

“There’s a constant struggle between the bulls and the bears when in fact the answer is in the middle ground. This market is more like a turkey and not a bull or a bear,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Fund Management in Menomonee Falls, Wisconsin.

Investors have been forced to readjust their expectations for the economy, with data showing the pace of the recovery has gone from a sprint to a crawl.

It has also prompted a divisive argument over the likelihood of an encore recession. But if worries over a double dip are starting to be washed out of the market, an unexpected positive could fuel the market higher.

The broad S&P; 500 also finds itself standing on top of a key resistance level that could turn into a floor for the market. The index closed at 1,102.66, just above the psychologically important 1,100 level for the first time in a month. The level has been a hard one to hold and could buoy the market if the move is ultimately a decisive one.

With the S&P; 500 edging out of official correction territory, trading down about 9 percent from this year’s April high, analysts appear to have reconciled themselves to a slower recovery than they had hoped for. A correction is generally defined as a 10 percent decline from the top.

“All the indicators still indicate growth, we’re just not growing as quickly as we were when we were coming off the bottom, and that makes total logical sense,” said Michael O’Rourke, chief market strategist at BTIG LLC in New York.

O’Rourke added he believes the selloff has run its course, and the early July low will prove to be the low for the year.

Analysts will be hoping to see more earnings season cheer from industrials companies next week after a slew of manufacturers this week topped expectations and raised full-year profit forecasts.

But the economy will remain the wild card, with the potential to pour cold water on investor enthusiasm and a round of top-tier economic data will be looked at to determine the strength of the economic recovery.

The Federal Reserve’s Beige book of economic conditions will also be scrutinized for any illumination of Bernanke’s comment that the outlook is “unusually uncertain.”

Analysts will also digest the results of the European stress tests on banks. But if Friday’s session is an indication, market movement will likely be muted.

What is has come down to is a battle of earnings vs. economic data. The bond market rally indicates that slower economic times are ahead. The recent stock market rebound supports the opposite. Both can’t be right!

We have to wait and see how this battle plays out in order to see which direction the next long-term trend will take. Right now, it’s anyone’s guess.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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