How Much Higher?

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Before I get to the market forecast for the week, just a quick reminder that this IS a bear market rally, and once it ends:

  • "Too-big-to-fail" banks like Bank of America andCitigroup, and corporations like Chrysler and General Motors, WILL ultimately be allowed to fail; their shareholders will be essentially wiped out andtheir creditors will have massive losses.

  • In the stock market, the bear market rally we've seen will end; the financial stocks will give up all their gains and the broad averages will plunge to new lows.

  • Credit markets will freeze up again, the government's stimulus package will be overwhelmed, and any pause in the economic decline will be over.

Having said this, I have no clue whether the bear market rally has a week or six months left to go.

As you can see from the charts below the markets have been steadily moving higher. April's close completed the best back to back monthly performance in over six years. And, the streak continued on Friday with both the S&P 500 andNasdaq finishing higher. At this point investors appear to be more scared of missing the rally than of a market reversal.

As I've been writing, markets that climb a wall of worry are typically headed quite a bit higher and this looks to be the case now. Stocks have been able to climb in the face of one bad piece of news after another, and I look for this to be the case again this week with the release of the bank stress tests along with the unemployment numbers for the month.

We started the week with the threat of a Swine Flu pandemic followed on Wednesday with the report of a nasty 6.1 plunge in first quarter GDP....amazingly neither news was able to drive the markets lower. The S&P 500 rallied after the GDP announcement and continued higher after the FOMC statement finding silver linings in both. The Fed is desperatelytrying to keep interest rates as low as possible by buying treasuries (quantitative easing).Low interest rates traditionally boost demand, and until the consumer comes back into the economy we will ONLY have growth as long as the government continues to supply it with larger and larger amounts of fiat currency.

However, interestrates have been climbing higher as investors (China for example) demand a higher rate of return with this ENORMOUS supply of bonds hitting the market. Folks, all of these taxpayer fundedbailout plans have to be financed with government debt.... and interest rates and inflation will be THE next big issue in the coming months.

Back to the market and where we are headed. Earnings reports have been surprising to the upside.Close to 70% of companies reporting have exceeded estimates...and although estimates that have been lowered dramatically, this is still animpressive quarter. Armageddon appears to be off the table for now, and the market is responding.

In spite of continuing economic report gloom investors are grabbing onto a few bright spots--Friday morning the ISM report showed manufacturing ticking higher over last month rising to 40.1 from 36.3 in March. A reading below 50 still indicates contraction but it's heading in the right direction. Consumer confidence also rose to its highest level since last September.

Next week the earnings parade continues with 84 S&P companies reporting and we'll likely see good results relative to expectations--which should lend more support to the current uptrend. ISM services, initial jobless claims and the Unemployment Report will be released. Even with all the hand-wringing, bad employment numbers haven't been able to derail the rally--and they probably won't this time either. Bulls have been shrugging off economic news and focusing on the sectors moving higher.

The market has a great deal of momentum and it has been able to break through major resistance. Every dip in the market has been short-lived and until this changes I will look for every opportunity to go long on pullbacks. I look for oil to trade back to $35 barrel or so before this is all over, but I also expect oil to hit $200 barrel in the next 3-5 years. For those that find this hard to imagine, remember that both oil and gold are priced in US $, and that once the $ begins to crack, these commodities MUST go higher in price...just as interest rates MUST go higher and just as bond prices MUST go lower.

Until some point in the next few days to few weeks, the bear market rally will continue. We now have major support at 8000 on the Dow, and any pullback should be used to buy. At some point the "wall of worry" will be too high to climb and the decline will resume...we're just not there yet.

Make it a great week all.

Kip