Friday, June 26, 2009

Treading Water

Stock market action during the month of June can probably be best described as treading water. So far this month, through 6/25, the S&P 500 is up 0.12% – which is basically dead flat. Each month since the market low on March 9th has seen progressively lower returns – said another way, the momentum of this latest rally has slowed considerably. So, is it time to take profits and head for the exits? Is another big bear market plunge imminent? While another decline cannot be ruled out, of course, our impression currently is that the market is digesting the recent gains and awaiting further economic developments before making its next move.

We believe that market may trade in a wide range between the low of 666 that was made in March and an upper bound of somewhere around 1,200 for some time. If true, that would mean we are smack dab in the middle of a very wide range. With increasing evidence that the economy is attempting to steady itself, we currently believe that there may be another leg higher towards the upper end of the range – although likely at a slower pace than the move we’ve seen over the last three months.

Looking at the chart below of the S&P 500 Index, we’ve written that it would be significant if it could trade and remain above its 200-day moving average (blue line), which it has done. It broke above that threshold earlier in June, and has since drifted somewhat lower back toward that downward-sloping moving average, which is also very close to its now upward-sloping 50-day moving average (brown line on chart). If additional signs of economic stabilization materialize in the coming weeks, it would help the S&P 500 hold above these trend indicators, which would be a positive sign that could indicate that there's more room to rally over the course of the summer.