The stock market continues to ignore my consistent invitation to put on a sustainable upside surge.  It also continues to avoid the waterfall decline that a growing majority of stock market participants believe should be taking place right now.  That leaves us with the rather unpleasant outcome of the dreaded trading range.  The market has been locked in this range for over three months and patience is wearing thin.  Many have proposed it is due to the coming election, and I can see the logic behind this belief.  I will caution, however, that waiting until after the results are in will most likely leave you thinking you should have taken action more quickly.  The stock market is a forward thinking animal and therefore prices events in weeks and sometimes months before they actually take place.

I believe the election will usher in several politicians who are considered stock market friendly by global investors.  These investors will not wait until November.  They started buying on July 2nd, and we should see a continued rise in demand over the next two months

There was an article on Bloomberg this week talking about the high premiums large institutions are currently paying for extreme downside protection.  These derivatives are more expensive today than they were at the end of 2008.  A lot of well known mutual fund companies are galloping around the world right now selling products that help protect against the next stock market black swan.  This tells me there are a lot of big players that expect the market to not only return to the March 2009 lows, but blow right past them. 

I believe it is always a good idea to look at the other side of a popular trend.  There is a massive amount of long term negativity built into the stock market today.  If they’re wrong by just a small amount?  The stock market can easily keep the latest rally alive.   If they’re wrong by a country mile?  The stock market could have significant upside potential from current levels.

Over the last three months, the temptation to join the herd has been almost unequaled.  The herd, as you may guess, was moving decidely toward the bunker.  We suggested avoiding the popular call to jump ship in early May after the flash crash, and all of the other selling panics that took place between then and July 2nd.  We held the consistent position that selling at those low points would most likely be seen as a mistake in the coming months.  And as of today, that steadfast approach (or stubborness as my wife might say) is paying off.  The market is currently at its highest level in several weeks, strongly above all of the panic lows seen during the second quarter.

While the market has certainly repaired some damage, there is still a lot of work to be done.  I believe it is almost a foregone conclusion that the S&P will challenge the mid-June high (1130) at some point before the end of August.  Of course there is still the 200 day moving average to be dealt with, which might come into play within the next two weeks.  Then there is the mid-May high of 1170, which could prove to be a daunting task to take out. 

If the April 23rd high of 1220 was a major top and the beginning of a nasty bear market, historical evidence suggested there would be one more upside run which could be used to sell into.  We are currently experiencing the rally, but it is still too early to determine if everything should be sold in preparation of the next bear market.  The next six weeks will go a long way toward clearing that up for us.  I do believe, however, that highly speculative or leveraged positions should be treated with caution until the market can surpass the previously outlined resistance areas.

Even though I wrote the last entry a few days ago, my sentiments are the same.  It looks like the market put in an important low on May 25th and June 7th.  I still continue to believe that the very short term may bring some unexpected swings in both directions, but the intermediate term should bring higher prices.  Please see the blog below for the details.

Keenan

Today is the longest day of the year.  Lots of sun, lots of fun.  Over the last few months, most stock market investors would disagree with this sunny forecast.  They’ve only seen darkness and felt despair.  Well, you know what they say about the night.  It is always darkest before the dawn. 

And so it was on June 7th when we posted our last entry calling for a market rebound.  That was the exact closing low for the correction that began April 23rd.  (Please also see the attached video of a Fox News appearance on February 5th.  That was the exact low day for the correction that began January 19th, and I strongly urged investors to buy).  

Now that a rally is kicking in, what should investors expect next?  Short term, the market is overbought and the rally may experience a little selling or at least some sideways action.  Intermediate term should bring higher prices.  It is over the course of the next 2 months as the market works its way higher that we have to pay very close attention.  If the market approaches the April highs on weaker internals, we just might have a major top in the making.  If the rally stays broad and strong, as it is now, then new highs and beyond should be on the way.  

We wait and see. 

Fox Business News Video Link