Stocks Rally: What to Watch

That was a terrific rally yesterday. Stocks chugged higher all day after Germany’s Constitutional Court chose to endorse the bailouts of indebted EU members. The court did say that and new commitments had to be voted on in Germany’s Parliament. But at least the bailouts passed the legality test…

Yesterday’s rally should also serve as evidences that there is still bullish sentiment out there. I know it’s sometimes easy to forget that stocks may represent either decent, or excellent value. The difference depends on how much earnings growth companies are able to maintain.

Analysts have lowered 2012 earnings estimates by around 5%. If that’s it for the revisions, then stocks are an excellent value. Moderate revisions would leave them a decent value. Either way, there is upside for prices.

For a brief discussion of current support and resistance areas, here’s TradeMaster’s Jason Cimpl:

The market blasted higher yesterday and the bulls recovered a lot of lost ground. The volume yesterday wasn’t all that strong, but the bulls were able to overcome resistance zones. SPX blasted 3% higher, which put it way past 1175 and took the index all the way up to 1197 resistance.

Now that 1175 has been reclaimed that area needs to be support. I didn’t like that SPX went below the 1175 level on Tuesday, but it recovered fast enough to give the bulls a second chance at 1250.

I still don’t think the bulls have what it takes to bring SPX above 1250 for any sustained period of time. As a result, we’ll use the same strategy as last week; go short above 1220 and keep all stops on long trades very tight once SPX breaks 1197.

Jason’s taken 9%, 14% and 6.5% gains in the last week. Nice work, Jason.

New unemployment claims ticked up a bit this morning. That may be good timing for the president’s jobs speech tonight. At this point, I’m almost more interested in how his message will be received than in what the specifics of his plan are.

Congress has done its level best to kill any kind of new spending. But at the same time, there’s no way to help the unemployment rate without fiscal policy that includes some kind of spending.

$300 billion (the amount Obama proposes to spend in jobs) sounds like a big number. And it is. Applied to the 14 million unemployed Americans, it’s $212,000 each.

But will it be enough to meaningfully impact the unemployment rate? If it were direct government spending, then yes, it would be enough to help. But if the administration is intent on filtering the money through the states, it won’t be enough. Because I expect states will use funds to shore up their own budget issues.

In May, the OECD estimated the U.S. economy would grow 2.9% in the third quarter and 3% in the fourth quarter. Today, those numbers were revised lower to 1.1% and 0.4%.

That is a huge difference. Clearly, the May estimates had to assume job growth, though I’m not sure why the OECD thought there would be job growth.

Anyway, the current estimates seem low, especially for the 4th quarter. I suspect the U.S. economy will do better than that. After all, it’s never wise to underestimate the strength of the American consumer.

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