Will The Rally Continue?

This morning I read the following article which was provided by The Wall Street Journal’s “The Morning MarketBeat.” Though the facts are interesting, and though the case for a continued market rally is plausible, I’m not so sure the cards our in our favor for continued stock market increases.

The Breakfast Briefing

As stocks have steadily marched higher throughout the last 17 months, a growing number of investors and strategists across Wall Street say the market is ripe for a decline.

But if history is any indication, this rally may be far from over.

The Standard & Poor’s 500-stock index has gone 505 days without a correction, deemed a 10% drop from a recent high. Since 1962, the index has rallied for at least 500 days without a correction during five separate instances, according to data provided by stock-market research firm Birinyi Associates.

In all five rallies, stocks averaged another 9.2% gain over the next six months and a 13% increase over the ensuing one-year time frames.

During the bull market that began in 1990, the S&P 500 rallied 2553 days without a 10% drop, according to Birinyi. The bull market that started in 1984 rallied for 1127 days without a correction, and the bull market that kicked off in 2002 went 1673 days without a 10% decline.

“This market’s rally without a 10% pullback is not out of the ordinary,” Kevin Pleines, research analyst at Birinyi, told MarketBeat. He said there is little historical merit to the notion that the market is overdue for a sizable drop.

“Looking at the history of the market, there has been no consistent point or metric during bull markets that indicate that the market is due for a correction,” Mr. Pleines said.

The S&P 500 finished on Friday at 1515.60. It is up 6.3% this year, after rallying 13% in 2012. That’s why some argue the market should be poised for a pullback, even if it doesn’t qualify as a so-called correction.

In a note to clients on Friday, Thomas Lee, chief equity strategist at J.P. Morgan, advocated some near-term caution. He said the S&P 500 would look more compelling if it fell to the 1400-to-1450 range.

Such a drop would be consistent with patterns that have played out since the market bottomed in March 2009. On average, rallies have lasted 55 days and risen 18% in between 5% pullbacks over the last four years, according to research firm Stone & McCarthy Research Associates.

Lately, the S&P 500 has risen 12% throughout the last 66 trading days since its most recent pullback that concluded in mid-November. There have only been four other instances throughout the last four years in which the market has rallied for a longer period of time without at least a 5% pullback, the research firm said.

“We think there could finally be a minor pullback at any time,” said Mark Arbeter, chief technical strategist at S&P Capital IQ. “While we continue to think that the market will grind higher in the weeks to come, risk appears to be rising and the call from here may get a little trickier.”

But on a longer-term time horizon, the rally may have more momentum behind it.

“We are still positive on stocks and believe the bull market will continue,” said Birinyi’s Mr. Pleines.

Morning MarketBeat Daily Factoid: On this day in 1943, George Harrison, the Beatles guitarist, was born in Liverpool, England.

Steven Russolillo

Source: WSJ: The Morning MarketBeat

Personally, I’m not so certain that “the rally may have more momentum behind it.” Unless, of course, our elected officials finally get their act(s) together. This Friday (barring any miraculous changes in the way our politicians have been doing business over that past several decades) $85 billion in automatic spending cuts will take effect. If the cuts are allowed to go through, the effects on our economy could be severe. Just a few of those potential effects are as follows:

Here are some details:

  • California would lose $87.6 million for primary and secondary education, putting roughly 12oo jobs at risk.
  • Ohio would lose about $6,865,000 in environmental funding to ensure clean water and air quality, as well as prevent pollution from pesticides and hazardous waste.
  • In Florida around 7,450 fewer children will receive vaccines for diseases such as measles, mumps, rubella, tetanus, whooping cough, influenza, and Hepatitis B due to reduced funding for vaccinations of about $509,000.
  • In New York, approximately 12,000 civilian Department of Defense employees would be furloughed, reducing gross pay by around $60.9 million in total. Army: Base operation funding would be cut by about $108 million in New York.
  • Illinois will lose about $587,000 in Justice Assistance Grants that support law enforcement, prosecution and courts, crime prevention and education, corrections and community corrections, drug treatment and enforcement, and crime victim and witness initiatives

Source: “While Sequester Looms, Congress Eyes Next Fiscal Deadline”

Don’t Underestimate the Economic and Financial Effects of the Sequester: Nouriel Roubini (Yahoo! Finance)


Even more worrisome is the looming March 27th deadline, which could see a government shutdown if congress does not pass a new federal budget.

At this point, I believe the thought for the day should be: “Caveat emptor” (Latin: Let the buyer beware.)

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