Major Stock Indices Up 12%

by George Leong, B. Comm.

The current rally is holding so far, with the major stock indices up about 12% over the past two weeks. Renewed optimism towards the U.S. and global economies is adding some buying to blue-chip stocks. The DOW has closed higher in 12 of the last 14 sessions to Monday. The gain on Monday was minimal, but the index battled throughout the day prior to edging higher at the close.

The near-term technical picture for stocks remains bullish, with high Relative Strength, but the markets are extremely overbought, so continue to watch for some profit-taking. It is normal to expect some selling after a rally. The key will be the degree of selling and whether stocks can extend the recent gains to new 52-week highs.

I continue to see an uptrend in the overall market. As of July 27, about 86% of all U.S. stocks are above the 200-day moving average, up from 82% a week earlier and 73% a month ago. The same goes for the shorter-term moving averages. Technically, this is key.

At this stage, I continue to be positive, but at the same time also anticipate that some profit-taking could and will likely surface given the overbought condition due to the rally. I feel that gains may not be sustainable or markets will sell on further gains given the continued uncertainties in the housing, jobs and retail sectors. The reality is that, unless there are improvements in these three key areas, the upside for stocks and the economy will be at risk. The housing market continues to show evidence of a pending turnaround. The new home sales report for June showed the fastest rate of volume growth in over eight years.

Confidence in housing added to job creation or a halt to the major job losses will add to consumer confidence and help to drive consumer spending, which accounts for two-thirds of the country’s GDP.

On the earnings side, second-quarter earnings and guidance have been relatively good. There are questions regarding the reduced estimates that many companies previously provided, so meeting or beating Wall Street EPS estimates has not been that difficult. There may be a question of earnings quality that could spoil the fun.

The second quarter will still be monitored for guidance, as many are hoping that the economy will turn positive late in the third quarter or fourth quarter.

Oil continues to edge back towards $70.00 a barrel and gold is back above $950.00 an ounce. Commodities are moving higher on economic optimism. China is reporting higher GDP growth, which will help to drive the global markets. It appears that the U.S. economy has bottomed. Now watch to see if the market rally continues to trend higher in the second half.