The stock market rallied Thursday, reestablishing a confirmed
uptrend, as the government reported strong retail sales and
The technicals show the market is in a solid uptrend but the
bears contend an overwhelming amount of evidence suggests the
bulls are headed to the slaughterhouse.
stock market today
SPDR S&P 500
) added 1.52% to 164.21 in slightly above average volume.
PowerShares QQQ (
), tracking the 100 largest non-financial stocks on the Nasdaq,
jumped 1.27% to 72.76 in below average volume.
SPDR Dow Jones Industrial Average (
) picked up 1.27% to 151.76 with trading lighter than
All three major indexes found support at their 50-day moving
averages, which is very bullish. Investor's Business Daily
changed its market outlook to a confirmed uptrend because of the
S&P 500's strong action.
"The upward trend is still intact," said Anthony Welch,
president of Sarasota Capital Strategies in Osprey, Fla. We've
seen that level be solid support all year, so for now, it just
looks like another common pullback.
The market will likely chop around between support at its
50-day moving average and resistance at its new high for several
weeks as many stocks have to work off overbought conditions, says
Mark Arbeter, chief technical analyst at S&P Capital IQ.
"Once this ends, we see new all-time highs for the market,"
Arbeter wrote in his weekly technical report. "So far, the market
has not traced out a major top. Despite the negative intraday
price action during many days since the May 21 closing high,
there have been signs that the bulls continue to step in during
the recent decline as they continue to buy the dips."
The Bear View
The bears on the other hand believe the market is due for a
deeper correction after rising 15% this year and 23% in 12
months. Some contend the economic fundamentals suggest the market
should crash below its 2009 low, which would amount to a nearly
60% drop from Thursday's level. Here's five reasons why:
1. From a contrarian point of view, investors are too
Breadth indicators that Tom McClellan, founder of "The
McClellan Market Report," tracks shows "big negative readings."
And from a contrarian perspective, bullish sentiment still
heavily outweighs bearish sentiment in the Investors Intelligence
survey. The difference between the bulls and bears hasn't reached
extremes seen at market bottoms, suggesting there's more room for
the market to correct, McClellan wrote in his newsletter
2. Japan's stock market, which has led the U.S. this year,
looks very weak.
The action in the Japanese stock market this month doesn't
bode well for U.S. markets as the two have been trading in tandem
this year, says Jeff Pierce, founder of
3. Earnings growth has been driven by share buybacks -- not
The uptrend this year has surprised Andrew Norman, an analyst
because corporate sales have been flat and the earnings per
share are growing mainly because companies are buying back their
own stock, thereby reducing the number of shares that profits are
"No one can be certain about downside potential, but the
economy is in far worse shape than in 2007," Norman said in an
email. He expects the market to eventually under cut its 2009
4. Stocks have surpassed their 2007 zenith but many economic
indicators remain deep below pre-recession levels.
This includes nonfarm employment, consumer confidence, total
retail sales, durable goods orders, and the Index of Leading
Economic Indicators. All the while banking reserves have rocketed
into the stratosphere.
The market seemed to cheer the 0.6% growth in May retail sales
Thursday. Sales grew 4.3% from the year-ago period. The number is
"statistically insignificant" because it hasn't been adjusted for
inflation, contends John Williams, founder of
"Without real growth in income, and without the ability or
willingness to take on meaningful new debt, the consumer simply
cannot sustain real growth in retail sales, let alone in the
broader personal consumption measure in GDP (gross domestic
product)," Williams wrote in a client note Thursday. "Neither
confidence nor sentiment has recovered from the post-2007 decline
in economic activity, and both measures remain at levels
consistent with ongoing, deep recessions."
5. Bonds, which usually trade opposite stocks, are oversold
and due for a bounce.
The Commitment of Traders report or COT shows commercial
traders -- the so-called smart money -- are heavily buying long
T-Note futures while the small traders -- the so-called dumb
money -- are heavily shorting T-Note futures in hopes of
profiting from falling prices. That suggests bond prices ought to
rally as the commercial traders are usually right and the small
traders are usually wrong, says McClellan of "The McClellan
Bonds have sold off to extreme levels recently because of
"confusing communications" from central banks in the U.S., Japan
and Europe, says David Kotok, chairman of Cumberland Advisors in
Sarasota, Fla. Economic indicators show weak growth and fears of
deflation in many countries around the world, which doesn't don't
justify higher bond yields.
"If markets have overreacted and bonds are very cheap due to
poor communication policies of central banks, then that presents
a buying opportunity in tax-free bonds, and we will take
advantage of it at Cumberland," Kotok wrote in a client note
withdrew $7.7 billion from U.S. mutual funds and exchange-traded
funds for the week ended June 13, Lipper Inc reported Thursday. A
vast majority of the total outflows -- $5.5 billion -- came from
taxable bond mutual funds and
SPDR S&P 500 ETF absorbed $1.2 billion in inflows while
MSCI Emerging Market ETF (
) lost $2.3 billion and
MSCI Hong Kong ETF (
) bled $1.0 billion.
MSCI EAFE Index (EFA), tracking developed foreign markets, popped
1.53% to 60.46. EFA has tumbled below its 50-day line but still
trades above its 200-day moving average, which indicates a weak
MSCI Emerging Markets Index (
) surged 2.12% to 39.11 after touching a nine-month low the prior
session. The laggard among global markets trades deep below both
its 50- and 200-day moving averages, indicating a very strong
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