Good Day, Good Week, Good Month...

Sorry that I did not post on Friday...could not get to my computer all Friday afternoon. To make up for it I made this one a little bit longer. Here we go...

Stocks opened on the upside but stayed within a confined range for the entire day. This is until the last hour arrived and some light buying came in. The light buying managed to push prices through the old highs for the week which then brought more buying into the market. After a rather volatile last hour all of the major stock indices managed to close on their highs of the week.

The Dow closed + 96.53 points or 1.15 % and the broader based S&P closed + 12.31 points or + 1.36 %.

Today's market was light on economic releases. The only notable number was a revision to the 1st quarter GDP number. The original estimate had set the GDP decline at 6.1 %, therefore today's release which pegged the decline at - 5.7 % made the bad news somewhat better.

Economists had on average expected the GDP number to be revised down to - 5.5 %...as such the actual revision was not as good as was hoped for.

Also...let's not kid ourselves. The real story here is that GDP declined at levels we have only seen once in the past 27 years. With the exception of 1980 the US economy has never lost ground at a faster pace then during the last 2 quarters.

The second quarter GDP estimates are currently projected to be around the -2 % area. Not a good number either but at least much better then the 1st quarter. The jury is still out whether we will see a positive 3rd quarter GDP number but for the 4th quarter everybody seems to think that we finally will have a positive GDP number again.

Of course, the 4th quarter will be measured against the 4th quarter 2008 which was when the economic downward spiral started....as such the baseline is much easier to reach.

Stocks trade on the assumption of how corporate profits will develop over the next couple of years. It is this long lasting view which enables stocks to rise even during times of economic crisis and declining profits.

Of course, whenever the longer term view turns out to be incorrect stocks then go through an adjustment process. (meaning they go down or up).

The current take of the stock market is that we will see better pastures next year. This is the reason why one of the biggest rallies in the history of our stock market took place during the March/ April period and was followed by another good month. (the S&P was up 5.2 % for the month in May)

The big risk which is inherent in a market like the one we are seeing today is that the projected economic developments cannot be reached and the market decides to adjust to a new reality.

If and when this happens stocks can loose ground very quickly.

I have been neutral stocks for the last 3 weeks because my general feeling is that the market has gotten to far ahead in its anticipation of future stock profits.

I do believe that there will be speed bumps on the road ahead which then open up the potential for a significant market correction.

On the other hand...if the highs from May are taken out, (and it sure looks like this will happen now) then we should see another push to the upside. In my view, in a best case scenario, we might be able to get another 7 % (plus/minus 1 %) out of the market before some technical barriers stop the advance.

This would put the S&P at 1000 and represents a 50 % increase in price from the March lows.

Any run to the upside should have the potential to reach the 9100 to 9200 area in the Dow. It might take 2 months but I believe this number is probable if we clear the 8600 level.

As I mentioned earlier...despite my attempt to offer you some perspective as to what might happen on the upside I am still neutral stocks and even short term bearish. The Dow will need to close above 8620 in order to change my outlook.

Have a great weekend,

Steve Benger