Rally in Great Shape So Far

With the market up about 11% from Tuesday through Thursday, which used to considered a decent return for a year, it was reasonable to expect stocks to back off on Friday. And so they did, until near the end of the day it became obvious that too many traders were short stocks, and they had to buy them back to get to a neutral position (“flat”) for the weekend. That gave us four straight up days for the first time in over a month, and the best weekly performance since November.

The professional reaction is just what we’d like to see: “The overriding question people have is ‘Is this rally it?’” said Quincy Krosby, chief investment strategist at The Hartford. “For that to happen I think we need to see more evidence of a turnaround. We still have significant problems in terms of unemployment. The problems with the banks are still there.”

Yep. And everyone on the planet already knows about unemployment and the banks. Ms. Krosby is forgetting that as usual the stock market will see the turnaround about six months before the economy provides any evidence of a turnaround.

All this was kicked off by the CEO of Citigroup saying the bank had an operating profit in the first two months of the year. While not an outright lie, it was a carefully phrased, meaningless statement. Banks almost always have an operating profit. It’s those non-operating asset writedowns that are the problem. Citigroup has no idea what many of their assets are worth, and thus no way to tell what they earned or even if they are solvent. (My guess: Not.)

But the rally now has its own momentum, and Friday was a picture-perfect consolidation day around 750. The S&P 500 started with a spike up to 757, then a test back down to 742, anf then the late rally into the close at 756. This is a change of character for the market, where for the past several weeks every rally has been turned back at the first important energy level. It looks more and more like a multi-month bottom is in place, and the recovery rally is already underway.

There’s still a little more short-term consolidation needed to build up energy for the next leg up, and with both the G-20 and OPEC meeting this weekend, there should be some negative news to at least retest 740, and possibly the 714 to 721 zone. A bounce from there that clears 750 would probably mark the safest short-term entry point so far this year. Not only is 850 now an easy target, but the recent action has put 1060 and even – dare I say it? – 1250 back on the table.

A 500-point rally in the S&P 500 to 1250, up 67% in a matter of months, sounds like a pipe dream. It may turn out that way if there is new bad news, but as always we will watch how the market handles 850 to see if 1060 is a real possibility, and then watch how it handles 1060 to see if there is a shot at 1250. The market will tell us what to do. Right now, it is saying: “Hold on, get invested, the easiest money is made when others are most fearful and suspicious.”

Initially, I expect to see significant moves in Amgen (AMGN), Electro-Optical Sciences (MELA), Akamai (AKAM), Cisco (CSCO), Cree (CREE), Energy Conversion Devices (ENER), Suntech Power (STP), American Science & Engineering (ASEI) and Alvarion (ALVR) as institutional money scrambles to get in. After than, the Sandisks (SNDK) and Harmonics (HLIT) of the world will move, followed later by the QuickLogics (QUIK) and Towerstreams (TWER). By the time we hit the next peak, these smallest companies will provide the biggest percentage gains.

As always, your comments are welcome.