Thursday, May 21, 2009

Will We Re-Test March Lows?

This debate has been gaining some traction. First, we have to take a look at where we're at. The S&P recent highs are around 930. Last week I expected to test a support level of around 875. I believe we got to around 880. I continue to believe we will have to move lower before we can make a longer-term move through 930 and beyond. But to re-test March lows of 666, we have to think about what conditions were then:

-Large-scale financial failure was still on the board. In my opinion, those fears have eased.

-Sentiment was very negative. The fact that stocks have now rallied this far will likely bring out more people willing to buy on the dips.

And now:

-Some economic indicators have slowed or stopped in their decline. This isn't a strong case for me, as employment is still weak, and the consumer is still in trouble.

My take: I think we should look at 875 first. If we break through that, we could continue further on the downside. Stocks don't have many catalysts like they had over the past couple of weeks (earnings, stress test results). This could lead to a "back-to-reality" sentiment in the market, which would put more downside pressure on stocks.

Here's an interesting video with David Rosenberg via Bloomberg on this debate.

I did say a couple of days ago that I'm more bullish than I was, and that is true. I will look to buy more stocks if I get a chance at better prices. But I need to see more on the positive side economy-wise before I can say we're in for a sustainable move higher. Any opinions out there?

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