Stocks Still Face a Challenge - 02/22/10

The recent improvement is a rally in a correction rather than the resumption of a new up leg.

The recovery trade (from a deep oversold) continued last week as Greece moved to the back burner, the discount rate hike was dismissed as technical and the rise in interest rates was ignored.

A benign inflation report on Friday helped as did the animal spirits.

While the market has successfully absorbed bad news, we are moving into some resistance and into a possible overbought, and I expect stocks to be challenged in the weeks ahead.

I view the recent market improvement as a rally in a correction rather than the resumption of a new up leg.

Three weeks of correcting prices seems short within a historical perspective.

As a wise and technically astute friend mentioned to me over the weekend, multimonth corrections often follow the first year of multiyear market advances -- for instance, in 1994 and 2004.

And, equally important, my mentor at Putnam Management Company in the 1970s, The Chief, has turned bearish!

As I wrote in my surprise list, I expect above consensus fourth-quarter 2009 earnings and first-quarter 2010 profit guidance to elicit limited market response. My surprise that the market would be flat during the first three months seems, thus far, to be right on the mark, as the averages are flat year-to-date.

I remain of the view that the S&P 500 will be stuck in a trading range between 1,025 and 1,150 for the next six to nine months.

Selling premium and/or opportunistic trading will trump longer-term investing in this time frame.