Over the course 26% rally in the S&P500 since its October 4th 1,075 bottom, the market has climbed a wall of worry. Many market participants, including us, have surely been left frustrated by the small pullbacks along the way up to the current level of 1,362. We haven’t seen a pullback much greater than 2% at all so far in 2012. The lack of a real pullback is creating many potential scenarios that could play out in the coming days, weeks, and months ahead.
In our view, the implications of this stubborn march higher are very bullish in the short term. Many naysayers have likely missed a good portion of this rally so you better believe there will be a good amount of support on small dips. Why? Because those on the sidelines will fear that this is the dip and scoop up equities for fear of missing a move past 1,400. That same psychology can pose trouble though.
If the market dips 1-2% and everyone is expecting that that is all it’s going to dip and it then goes on to fall further, panic could ensue. However, even if that is the case we don’t think the panic would last very long. Why not? Because if we’ve learned anything over the last few years, its when panic sets in that’s usually a good buying opportunity (see fall 2008, march 2009, summer 2010, August- October 2012).
Really there is only one thing that can trump this rally: poor economic data. Furthermore, if such data does come out, it will likely take a few months before it really affects the market. While we receive economic data on a weekly basis, the market would probably need more than just 1, 2, or even 3 bad reports over a few weeks span to really rattle investors.
Remember those “double dip” recession whispers that we heard over the Summer? Anyone who got caught listening is kicking themselves right now. Therefore, we’re going to need a consistent amount of poor economic data over an extended period of time (call it 2-3 months) before we see this clearly bullish uptrend reverse. In the meantime, lets see if the S&P500 can sustain its perch above the 1,350 level and take out the May 2011 highs at 1,370.
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