What We Really Need to Keep the Stock Market Rally Going

— “Calling the Trend” Column, by George Leong, B. Comm

This market looks like it wants to move higher, as shown by the trendline. The break by the DOW at 10,000 was psychologically important, but it is not a big factor, as it has been broken on many occasions. What are continuing to drive the current rally are some strong earnings, especially from the technology sector, which continues to provide leadership.

Earnings have been strong so far. Of the approximate 61 S&P 500 companies that have reported, about 79% have exceeded EPS estimates.

We have seen impressive results from Google Inc. (NASDAQ/GOOG), Apple Inc. (NASDAQ/AAPL), and Intel Corporation (NASDAQ/INTC) to name a few. But, while earnings continue to beat estimates, there also continue to be mixed results on the revenue side, as there are shortfalls due to the slowing economy. Earnings have largely been exceeded due to aggressive cost-cutting and downward revision in earnings estimates. My opinion is that this cannot be sustainable and we need to see revenues grow in order to justify the stellar rally in stocks that we have seen.

It seems that the big market leaders are doing well, taking market share way from the smaller players. Buying the “best of breed” in a sector remains an excellent way to invest for those who are less speculative. Over the long term, the top companies like Google, Apple and Intel will continue to be market drivers in their respective areas.

At the same time, you should be careful, as markets have come a long way from the March lows. You’ve got to wonder about the sustainability of the current rally. I get a sense that, as markets trend higher, they will become increasingly vulnerable to selling if any major bad news surfaces. There is a lot of growth and good news discounted in this market.

We are also beginning to see euphoria on Wall Street with the bulls and in the media. We are seeing some eye-pooping price targets on some highflying stocks. Google was given a $750.00 price target by Canaccord Adams. Just think back 10 years; remember that we saw similar outlandish price targets given: just like the DOW 20,000, which was believed back then to be achievable.

At the end of the day, markets continue to trade at multi-year highs, with about 92% of all U.S. stocks above the 200-day moving average as of October 19, up from 90% a week earlier and in line with 92% a month ago. The same goes for the shorter-term moving averages. We continue to see stocks hit new 52-week highs and this is reflected in continued bullishness in investor sentiment.

At this point, continue to watch earnings as they pick up this week. Watch the guidance going forward.

Markets are at a pivot point. For the rally to continue, earnings and economic data will need to continue to be positive.