Stocks showed tremendous resiliency again Friday; with the major indices closing higher on the session despite an increase in the Discount rate. The bulls are back in the driver’s seat. We could have done without the shakeout that stopped short of an oversold buy set up, and the subsequent turn on a dime, everything is o.k. again rally that took out resistance as thought it wasn’t there; but that’s the hand that was dealt, and we are now back on the bull train to 1200 on the S&P 500 (1109.17) and that long awaited meeting with the down sloping 200 week average (currently 1230). The S&P 500 very bullishly closed last week back above both the 10 and 20 week averages, and the stage is set for further advances. Our own view is that we will probably see higher ground near term as we celebrate this change of trend back to the bullish side of the pivot, but after a few more Up sessions, we will see a brief consolidation that mends the current overbought condition; and it is that consolidation that will provide the best opportunity to get back on the side of the bull with increased conviction. Lowes (LOW – 23.13) is out this morning talking up the return of the consumer. This follows what we already know; that economic activity continues to suggest stronger growth ahead and earnings will most likely reach $80 for the S&P 500 this year. Companies are as lean as any time in history, continue to sit on mountains of cash, and any increase in the top line will be met with a more than proportionate increase in earnings. The turn around over the past year has been truly amazing, but the general malaise of negative perception persists, and the wall of worry will continue to be climbed. The forward p/e on the S&P 500 is 1109/80 or 13.9, which translates to a forward earnings yield of 7.2% or almost twice that of the 10Yr Treasury at 3.79%. We remain historically cheap when compared to prevailing interest rates, and as there is no other way to value cash flows than to assess the prevailing cost of risk free money, stocks remain as cheap as any other time in history. The fact that analysts routinely throw out mean p/e multiples of 15 and 16 and say that represents fair value, fails utterly to appreciate the fact that a $1 earned in a low interest rate environment is worth more than a $1 earned in a higher interest rate environment. However, just because a Johnson & Johnson (JNJ – 63.81), for example, sports a 7.9% earnings yield, does not mean investors will suddenly leave the safety of the bomb shelter to take advantage of these values, but it does set the foundation for further appreciation into the future, and it more than likely suggests little downside, and it provides a platform from which investors should not be surprised by continued market strength. However, the initial reaction of most investors out there is surprise and bewilderment to the strongest stock market rally in 80 years, but that is because they have been conditioned to be negative on stocks and negative in general. Rarely will anyone say that we have an historic discrepancy between prevailing interest rates and earnings yields. The more likely response is that the country is immersed in a sea of debt, this recent rally has no connection with underlying reality, and the bear will no doubt growl again. However, the fact that stocks are as cheap as anytime in history relative to prevailing interest rates is not a statement of opinion; it’s a statement of fact. The mid-year of any election cycle will nearly always see a painful correction, and the recent pullback, in our opinion, did not qualify. We suspect that the long awaited run to the 200 week will now play out and that a move to the low 1200’s will be met with strong resistance. It is after that point that a more meaningful correction will evolve, one that likely undercuts the lows of Feb 5th over the summer months. From there we suspect a strong rally to end the year. So for now we are back on the road to 1200 and we should look to buy weakness.

S&P 500 (1109.17) found resistance at the 50 day which is at 1109 today. This is a natural pause point as we wait for the 10 day average to play catch up. The 10/20 day convergence comes into play at 1086, which is just above the old three month trading range low at 1083. We would be aggressive buyers on any pullback to 1086. Our suspicion, however, is that we move back to 1130 near term and that the ensuing consolidation from that point will find support at the up sloping 50 day average; and that after solidifying support at that juncture, the stage will be set for a rally to new ’10 highs and onto 1200.

Nasdaq (2243.87) consolidating above its 50 day average, which should provide support at 2232 today. Any move below Friday’s low at 2229 should see some accelerated selling pressure back to the up sloping 10 day average (currently at 2191). The slope of the 20 day is now turning back up and it is at 2186 today. We would be strong buyers in the 2185/2195 area. However, we suspect we will see some more near term upside, perhaps back up to the 2270/2300 level before some consolidation, and that the recently recaptured up sloping 50 day average will provide strong support.