Spring Pullback Over? Not So Fast - Cook`s Kitchen

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Tuesday's surge certainly entertains the idea that the pullback is indeed over. The trend of economic fundamentals support the bullishness, with strong data in manufacturing, jobs, housing, banking, and consumer spending and confidence.

And the earnings report cards so far have been encouraging, confirming some degree of first quarter strength in stock prices. But we've heard from barely 100 companies in the S&P 500, so the corporate profits jury is still out, especially as earnings may have grown only 1%, or less, in the first quarter.

It's quite possible that the market has gotten ahead of earnings that will get more momentum in the second half. We have yet to hear from enough multinational companies about the impacts they see on their businesses this year from Europe and China. In this regard, I look forward to reports and guidance from IBM ( IBM ), Eaton ( ETN ), and Caterpillar ( CAT ).

So while the market has been easily able to shake off Euro-debt worries that resurfaced when Spain's borrowing costs topped 6% again, and China's slow-down looks smooth and soft, I don't think the pullback is over for two reasons:

1) Institutional investors want to see earnings and hear guidance from more companies over the next 2 weeks before they can confirm that a real profits slow-down isn't about to unfold as S&P 500 full year estimates have slipped from $110 to below $103 in the past six months. Many are also busy revising their GDP forecasts upwards above 2.5%, and they await April 27 for the first look at 1Q growth to see if they got it right.

2) Technical price damage to indexes and sectors needs to be worked through so that the weak hands are flushed out and the strong bulls can put a stake in the ground at new value levels for the next leg higher. This sideways consolidation trade is actually very good for the long-term health of this bull market.

Let's go to the chart and see what we are up against and where the big opportunities will be...

Having found some support below S&P 1,370, a key level all by itself, today's surge would be very encouraging to mark a close above 1,390, the site of repeated support in March. The importance of 1,370 lies in the fact it was roughly the top in 2011 and the 50-day moving average just recently conquered 1,370-75 in the past week.

1,350, though not marked on the chart, is also a key level for me because it was the main pivot where prices spent a lot of time in the head and shoulders top of 2011. So the fact that the market found plenty of buyers without even touching 1,350 is significant.

But it's also a function of the fact that many money managers got left behind when the bull train left the station at 1,300. And it doesn't mean we can't test 1,350 more meaningfully. In fact, I was surprised we cut through it so quickly in February. To test it further would be very constructive for this bull market.

And the March lows at 1,340 would be nice to see hold when doing so. But if 1,340 falls, it means fear has accelerated about earnings and the economy. "Did the market get way ahead of the fundamentals? Oh no! Sell everything!"

This will be a buying opportunity if it happens. I would have a shopping list of strong stocks to buy at 1,340 and 1,320, and even 1,300 if we get that lucky. On December 20th, I proposed that we were getting our last look at S&P 1,250 for a long time. I'm sticking with that prediction.

How Healthy and Strong is the Bull?

Some strategists think the recovery is fueled primarily by the Fed's easy money policy and that the leveling off in the earnings picture means we are due for a much more severe correction. I disagree. The economy has gained its own footing and is still poised for upside surprises. The menace of deflation must be soundly beaten before you can worry about inflation in a mature and complex economy like the US.

We've come a long way in this economic recovery and bull market. And it's not over. But just as markets rush to price in extremes to the downside, they also do so up top, especially as investors get left behind. So this consolidation phase after a 30% run off the last bottom is very healthy indeed for the bull's strength.

The bull is well alive indeed. So be ready to buy the next steep pullback when it comes. Plan to scale into it at the levels I've talked about. And if it doesn't come and we overtake S&P 1,400 again before May, then look to buy inevitable tests back to 1,375-90.

If the global economy can handle the debt crises and deleveraging of the past five years, which incidentally have not derailed the emerging markets bulls, we should see S&P 1,500 this year.

For a video analysis of the charts, including the Dow and the Russell 2000, check out this link...

Pullback Targets and Opportunities

Kevin Cook is a Senior Stock Strategist with Zacks.com
CATERPILLAR INC ( CAT ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
Referenced Symbols: CAT , ETN , IBM

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