The Market Rally: How High Can Stocks Go?

Posted by: Ben Levisohn on June 2, 2009

On the heels of yesterday’s 3% gain, stocks are taking a well-deserved breather. The Standard & Poor’s 500 closed had finally busted though 930 — a significant point of resistance. January’s rally died in the low-930s. And the recent upswing topped out at 929, before trading sideways for most of May. But on the first day of June, traders pushed the S&P 500 through the resistance to a 942.87 close, up 39% from the March low.

Thanks to today’s pause, we have time to consider what comes next. Back on May 11, Greg Trocolli, a trader and the author of a technical newsletter for Opalesque, thought the S&P 500 would head straight for 1000 if it closed above 939. Well, we’re above 939. Barring any unforeseen bad news (the bane of every technician’s existence), the S&P 500 should trade 1000 soon.

But can it break through? MF Global’s Nick Kalivas puts the odds at around 33%. Working against the market are, you guessed it, fundamentals. After posting the worst earnings in history, the market seems to be pricing in renewed profits. A sustained push above 1000 would also require a return to something like normal growth. “I’m skeptical it will develop,” Kalivas says.

Still, the rally’s resilience has taken many by surprise and there’s a relatively clear technical path to, say, 1100 or so if the S&P 500 breaks 1000. But we’re nearing the point where the smart money will be coming out and the dumb money rushing in. But don’t take it from me. “We believe…that the risk/reward ratio for new purchases has become dicey,” says Alfred E. Goldman, chief market strategist at Wells Fargo: “Despite our bullish stance on the stock market and optimism about the economy, we advise investors to be a bit cautious.”

Good advice, in any market.

Reader Comments

John D.

June 3, 2009 11:13 PM

Like Kalivas, I'm also doubtful that the S&P 500 will break 1000 any time soon. Some well-publicized stimulus or stimuli need to occur before we reach that point, IMHO.

http://www.smartwallet.org/

The Mad Hedge Fund Trader, San Francisco, CA

June 12, 2009 12:16 AM

The market has gotten so dead here that I have started watching Suzie Ormand to get trading ideas. So I’m not supposed to run large balances on my credit card? Who knew? A hedge fund friend told me that the market is now like watching a ball tossed in the air that is at the apogee of its move, just before the free fall begins. No news, with shrinking volume and volatility. General Motors (GM) isn’t a stock anymore, so all of the news flow there might as well be a History Channel documentary. You can only sell so many out of the money short dated calls on other stocks before bumping up against risk control parameters. Even if you do make money in these conditions, it is at the expense of a Maalox addiction to fight the multiple holes in your stomach. It’s not worth it. This is why I prefer to spend my summers mountain climbing or practicing my ballroom dancing. Please see my “Sell in May and Go Away” opus at (http://www.madhedgefundtrader.com/May_1__2009.html ).

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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