Another Up Day, Another Up Week and Another Muti Week High

The Fed released the parameters to be used for the bank stress test's today and the market used it as the reason to head higher. Stocks opened a bit stronger and found their footing within the first hour. We traded higher throughout the day with the pace of the advance accelerating after the release of the stress test parameters at 2.00 pm EST. As has been the case over the last week we once again reversed course during the last 30 minutes of the day giving up some of the earlier gains. At the end of the day the Dow closed + 118.03 points or + 1.48 %.

The Nasdaq and the Russel 2000 index both made new highs for the period since the recovery rally started. Interestingly though, both the Dow and the S&P failed to match this and did not make new highs for the move. (more about this later)

Corporate Earnings were mixed with heavyweight Microsoft coming in weaker as expected and Ford surprising to the upside. Earnings wise it was a mixed week...about 2/3rds of companies releasing results this week came in short of and the remaining 1/3 exceeding expectations.

Investors were spooked throughout the week but never the less we managed another strong performance on Friday which led us to the 7th week in a row with a higher closing in the case of Nasdaq and Russel. The S&P and the Dow though both failed in their effort to make a new weekly high close.

Some of the major indices are now almost 40 % (Russel 2000 Small cap Index) above their lows from early March, making this rally truly historical.

The real question seems to me now whether the market is trading on a "to lofty" set of expectations. To put it in perspective...an advance like the one over the last 7 weeks is a once in a generation type event. The current pace can simply not continue like it has and the chances of some form of market correction are increasing markedly.

The divergence in performance between the Dow/S&P versus the Russel and Nasdaq at the very minimum suggest that some caution about the recent advances are justified.

I still remain neutral on the market and expect some form of pullback. Unless the Dow closes above 8150 I believe lower prices are coming. I expect the Dow to trade down to 7800 next week and would reevaluate there.

If however the market closes above 8150 then the current rally might well have some more gas left in the tank. The Dow might then head north towards the 8400/8500 level at which point I would almost certainly turn outright bearish.

Have a good weekend,

Steve Benger