Market Doing its Best to Extend the Mini-rally

by George Leong, B. Comm.

Stocks are sure doing their best to extend the current mini-rally. Investor sentiment is bullish in both the broader market and technology.

After last week’s rally, the major stock market indices are continuing to edge upwards towards new 52-week highs. On Tuesday, the DOW closed higher for the ninth time over the last 10 sessions. In the process, the DOW closed above 8,900 and looks to be eyeing taking a run at 9,000 if the rally holds. Technology and growth stocks also remain strong with the NASDAQ above 1,900, up over 21% on the year. Small-caps are also in a nice rally.

The current buying is positive, but what I feel was the key was the ability of the markets to avoid major selling after the recent break below the breakout levels. There are clearly investors and traders willing to buy on market dips and this is positive for stocks.

There is some excitement towards stocks, but not the interest needed to really make this rally feel like it is sustainable. The trading volume has been average during this recent buying. We do not see increased participation in the rally. Watch this.

There is an upward rebound in the overall market. As of July 21, about 82% of all U.S. stocks are above the 200-day moving average, up from 74% a week earlier and 66% a month ago. The same goes for the shorter-term moving averages. For the market sentiment to improve, we need to see the moving average continuing to trend higher.

Technically, the near-term signals are bullish, with rising Relative Strength, but given the gains of the past week, markets are technically overbought, so I expect to see some selling pressure.

The current rally has been driven by decent second-quarter earnings along with renewed optimism that the recession would come to an end later this year or early in 2010. Again, I feel that the economy may not show stronger growth until at least the first or second quarter of 2010, but it could more likely be in the second half.

With unemployment at close to 10% and the jobs market remaining weak, it is difficult to see increased consumer spending to drive the economy. Add in the weak housing market and you get a sense that the rally may not be sustainable.

For the near term, you should continue to watch the second-quarter earnings, especially the guidance coming from companies. It is looking like earnings will get better in the third and fourth quarters, as long as the economy continues to show improvement. I recommend that you carefully buy on market dips. Yet also keep in mind that there could be near-term swings in the market, so the key is patience. Be careful about chasing stocks higher, as there will likely be opportunities to buy when markets dip.