The Correction Within the Current Bear Market Rally: Will It End Soon?

And so the S&P 500 Index is trading right around a key resistance level of 1,220 and, if it can prove to hold above this level, this could be the breakout the market’s been needing. It’s been a tough go for the stock market over the last several weeks and we’re due for a little upside.

Bear Market

Bear Market

Along with more certainty on the sovereign debt issue in Europe, corporations now have to step up to the plate and deliver on earnings. Other than the financials, we’re seeing good numbers so far from big, brand-name companies—especially in technology, which is refreshing. In the last several quarters, the technology sector was a big disappointment, especially at the retail level.

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Although the spot price of gold is somewhat being held hostage by the strength in the U.S. dollar, large-cap gold stocks are very attractively priced at this time and I think the marketplace has created a good entry point for new positions in this sector. I would also consider new positions in oil at this time. The spot price is ripe for an upward move as investor sentiment improves.

All this market needs is a little more certainty on Europe and the economy. It doesn’t need a lot of reassurance—just a little. With this improvement, stocks can rally throughout the fourth quarter and we could finish off the year with a nice little gain.

Helping the cause is the fact that the stock market is fairly valued currently and that a lot of reduced expectations for economic growth have already been priced into the market. Institutional investors have been chomping at the bit to buy stocks in this market, but they’ve been waiting for a catalyst. It’s possible that the catalyst won’t be anything definitive, but rather just a reduction of investment risk (caused mostly by the debt crisis). Everyone knows that the world is awash in debt and so does Wall Street. For the most part, Wall Street is okay with this, because they are used to operating in a world of debt and leverage. All capital markets require is a clear and actionable plan, with a time table, from European policymakers, and a lot of certainty will be restored in global capital markets. This doesn’t mean that Greece won’t default on its sovereign debt, but financial markets need to know that the rest of Europe and the world will stand behind a real restructuring plan for that nation’s finances.

Like I say, the broader stock market is going to face some resistance around 1,220 on the S&P. If corporations come through on earnings and visibility, and the debt crisis gets under control, I see no reason why the main stock market averages can’t pop higher by a solid 10% before the end of the year. The correction within the primary trend (a bear market rally since the March 2009 low) may soon be at an end.


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