The major indices posted their best percentage gains in three months yesterday, with more than 95% of all the stocks in the S&P 500 moving higher. The major indices are still below their 50 day moving averages, but we have seen this story before, in July and November of last year, when just as it seemed a more meaningful correction was about to play out, the market screamed back to the upside. We confess we would have preferred any of the past three attempts to correct to the 200 day averages, for it would have ultimately been so much more profitable. Nothing is more frustrating than being whipsawed around the 50 day average pivot, and in particular this latest pullback really gave the appearance of developing into something more meaningful. Despite one of the greatest earnings seasons on record (average beat was 11%), stocks were reeling because of domestic political concerns or potential contagion in peripheral European nations. O.K, get it going, give us the 200 day set up on AAPL, GOOG or MSFT etc. But just when it seemed as though the panic bears would oblige, stocks promptly turned and headed higher again. What changed? Nothing. It is what it is, and we are not out of the woods quite yet, but if we go on to recapture the 50 day moving averages on a closing basis (2228 on the Nasdaq and 1109 on the S&P 500) then it would suggest a rally back to the January highs. Over the past forty years we have only seen one mid-election year (1986) that did not see a substantial correction, and we don’t believe our recent garden variety pullback qualifies. One of the reasons we were so bullish to start the year was we felt such a correction would only play out once the S&P 500 (1094.87) had tested its down sloping 200 week (currently 1230), and with what was obviously going to be a huge earnings quarter, the foundation was in place for a early year spike into the low 1200’s. The market seldom exists to accommodate and that certainly has been the case recently. If we do see a move back into an Up trend now, then we will not be applying the kind of aggressive long side exposure we did earlier in the year, as that profit capital was lost on the three session swoon after the Massachusetts senate results. We now need to gradually move back into a more aggressive long side position, especially if recent strength is confirmed by both Ts indicators moving above 1.00, and grind out a return to our mid-January profit highs. We are not out of the woods and any failure of recent strength to hold and a move back below 1075 on the S&P 500 would encourage our short scenario back to the 200 day/50 week, but the near term advantage has swung back to the bulls.


S&P 500 (1094.87) the 20 day is now support at 1088, as is the 10 day average at 1076. Below 1075, then the initial more meaningful correction scenario is back on the table, but for now moderate weakness can be bought as the bulls are starting to gain the advantage. Resistance is at the Feb high at 1105 and the 50 day at 1108. Any test of this 1105/1108 area will most likely see some intraday selling pressure, but unlike in previous sessions, we would then look to buy that weakness, especially back down to the 1076/1088 area.


Nasdaq (2214.19) is testing the 50 day average this morning towards 2228. We would expect a pullback from there on a near term overbought condition. That said we would now look to buy moderate weakness, especially back down to the 20 day average at 2187, and the 10 day at 2163. While we are looking at a near term short set up underneath the 50 day and into the body of some near term resistance, we are now far more inclined to buy pullbacks, especially back to the 2163/2187 area.