Waiting For Godot

Few can deny the market has moved significantly to the upside and in is need of a rest.  By almost all technical measurements, the “market” has been overbought and could use a pullback.  There certainly has been multiple occasions recently when political and/or economic news has provided a perfect excuse for a “pause that refreshes”.  As in Samuel Beckett’s play, Waiting For Godot, market participants have been waiting by the side for the market to correct.  And as with Godot, the individual for whom the two main characters are waiting (in vain), the market has failed to pull back.

Unlike Godot who never arrives in Beckett’s play, however, in my opinion the market’s pullback  has already arrived and is hidden in the bushes in the form of internal rotation. Many of the big winners during the September – January rally (such as Amazon) have already suffered significant corrections in the past few weeks.  And even when a more serious correction arrives,  it is likely to remain controlled and rotational.  Accordingly, we need to give the bull the benefit of the doubt, but shorter term, choosing stocks carefully is becoming increasingly important.

The overbought condition of the market remains a condition of strength and should not be contradicted until it comes out of that condition.  If the Dow Transportation Average can break out and close above 5,257, then overbought or not, all the popular market averages will be in gear to drive further to the upside.  There are certain levels to watch on the downside which would indicate a pullback is on its way:

For very tight downside levels of support, watch:

  • the S & P 500 to break below 1,310;
  • the Dow Jones Industrial Average to break below 12,900;
  • the NASDAQ to break below 2,769; and
  • and the Russell 2000 to break below 804

For a more serious correction, watch:

  • S & P 500 to close below 1,275
  • the Dow Jones Industrial Average to close below 11,800
  • the NASDAQ to close below 11.800; and
  • the Russell 2000 to close below 771

There are confirmed signs now that our economy is shifting into a higher gear and supporting the strength of the market, which acts as a discounting mechanism.  Our GDP is on course to grow 3.4-3.5% this year vs. 2.9% last year.  According to a recent Kiplinger report, business confidence is climbing at both big and small companies.  Nearly 80% of CEO’s at the Business Roundtable expect sales to increase in the first half of 2011, 60% plan to raise company spending, and 45% plan to add to their payrolls.

Consumer confidence is climbing, and the Conference Board Index is over 60 again for only the second time since it fell from over 100 to a recession low of 25.

New hiring does remain sluggish, but layoffs are waning.  At the same time, we are seeing a reduced rate of  productivity gains.  Consequently, we expect to see some hiring momentum through the rest of the first half of this year.

Pressure on home selling prices appears to have halted its downward trend (even though recovery won’t start in earnest until the number of foreclosures retreats).

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