Who would have guessed it? By mid-September, we’re on a bit of a bull market rally, especially on some really mediocre economic news. Investors have looked past the bad news to keep the markets pressing higher. It’s been just good enough to keep us from falling below 10,000 on the Dow, and for us to push above the 200 day moving averages (key support and resistance levels) for both the S&P 500 and the Dow. The markets held tight to recent gains, making it the 3rd straight week of advances. The S&P 500 has risen 7.2% since Aug. 31st, paring its loss since reaching a 19-month high on April 23rd (+7.6% YTD as of that date).
Unfortunately, the recent gains probably aren’t strong enough to carry us too far above current levels, at least until earnings season gets underway in October. That should provide plenty of clarity, but it’s still a few weeks off, and then mid-term elections are November 2nd. Simply put, we’ve raced pretty hard, pretty fast with the most recent rally that we probably need to see a bit of consolidation first before we continue our journey higher.
Speaking of racing, the St. Leger’s horse race just took place last Saturday in England. Remember back to the adage, Come May, go away, come back St. Leger’s Day. Well, if you are a betting person, then it’s time to get back into the markets.
While it may be a tale of lore, it worked really well this year and those that did are probably feeling pretty smart right now. No one would blame May’s sellers if they put their gains on a good-looking pony instead of coming back before St. Leger’s race (Arctic Cosmos won, by the way).
Looking back on the S&P 500 for the year (using the index ETF SPY), we see that we are right back to where we started. The chart below shows how SPY moved up 8.4% from its opening price on the year and then back down 9% from its beginning price. That’s enough volatility to both raise hopes and spark fears over a 9 month period.
So is this the time to get back in? Well, it’s not obvious but I do think you have to get your short list of companies to own in order. While most investment banks have revised their year-end index calls lower since May, many still have targets for the S&P 500 that are still 10-15% higher than where we are now. Not bad if that happens, but no one is forecasting a stellar finish – more believe that the first half of the year was as good as it gets.
My take? All in all, I think we have seen the lows for 2010. We may see a small correction of 3-5% but I don’t think we’ll go lower than that, depending, of course, on how some of the big domestic and foreign issues play out. The markets want to go higher as they push up against key resistance levels. I’m thinking we’ll decisively break through resistance in late October/early November based on 3rd quarter corporate earnings, slightly positive GDP numbers and Congressional gridlock (Republicans picking up seats), which could mean relief from higher taxes coming sooner than later.
Fingers crossed for more favorable data and better days ahead.
Stay healthy, wealthy, and wise,