Is This Rally Another Trap for Investors?
The market ramped higher yesterday. Volume wasn't particularly impressive, but the gains were. All major indices were higher on the session. Basic materials stocks led the charge, up 4 percent, but most other indices were up 3 percent in yesterday's bull stampede.
The gains were attributed to a better than expected holiday spending weekend - and that line of reasoning makes sense. Consumers raced back to the malls, despite difficult economic conditions, and spent cash at record levels. Since the U.S. consumer drives the U.S. economy, any small pickup in consumption has a widespread impact on economic growth.
However, I am not sold, so to speak, that the big results from retail this weekend will have a lasting impact on the economy, or the market. The indices were long overdue to correct. And the 1 percent decline on Friday took many stocks to extreme technical levels. The indices were already poised to rebound 2-3 percent from a technical perspective. While the great retail data was reason for the market to rally, it should have only added 1-2 percent, not 3-4 percent, on that report.
I want to be more bullish and I have been mostly bullish for the past few months. But the market declined heavily over the past few weeks on some important news items. And as I see it, those news items haven't been resolved.
Over the past few weeks default fears from Europe, namely Italy, have overtaken the market. Investors panicked when the interest rate on Italy's bonds moved higher and debt financing became more expensive. Yet, during Italy's bond auction today, the interest rate on that debt came in higher than expected, but investors didn't panic.
Also, it is rumored that France will lose its AAA rating in the next 10 days. And Fitch revised the U.S. debt outlook to negative from stable. The negative revision was due to the inability of Congress to reach a deal on deficit cuts and could result in a downgrade of the U.S. credit rating sometime next year.
The problems that took SPX from 1290 to 1158 still exist. One good report on consumer spending hardly changes those underlying structural problems. I remain bullish, but I am not encouraged by the reasons for yesterday's rally.
Also, as mentioned yesterday morning, it will be very telling to see if 1197 acts as resistance, or if last week's breach of that support zone was a false breakdown. The SPX found resistance at that price level yesterday. But should the bulls recapture it today, they would control the near-term trend, which should bring SPX back up to 1250.
