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The market has staged a remarkable recovery from the depths of recession fears and European worries in the second half of 2011. Ever since the reversal bottom in October, I have been trading the swings higher calling for S&P 1,350 in the first quarter. And the question I have kept asking is this...
"As long as earnings are meeting expectations in the aggregate, and the European problem is stable, why can't the market keep going higher?"
Look at a few of the positive forces...
Exceptionally low interest rates
Global growth moderating, but not recessionary
Valuations and market multiples attractive in the low teens
Europe apparently able and willing to prevent financial collapse
China ready to re-stimulate their economy after slowing the pace a bit
Fund managers deploying cash and afraid to miss the upside
Plenty of bears (and bulls) doubt the rally right now, and that is fuel for upside
"Bulldozing the Recession, Excavating the Boom"
Need proof that the global economy is humming along? Look no further than Caterpillar (CAT - Analyst Report) earnings. In 2009 and 2010, I followed the conference calls with CEO Jim Owens and the current chief Doug Oberhelman religiously. Why?
Because they were so tied to emerging markets growth, and their development of manufacturing and sales facilities in China gave them as clear a read as anyone what was going on. Thus the title in quotes above that I used more than once to describe CAT's resurgence from the 2008 recession.
After CAT's blow-out earnings in 3Q2011, Oberhelman talked about why the China slowdown was such a good thing because it was preventing a bubble (and subsequent burst) that would hurt the slow and steady 10-20% growth they were seeing in revenue and earnings.
In short, if you want to know about China's economy, listen to CAT. Sure, there are good arguments about how they are merely building "ghost cities" and "bridges to nowhere." But, Chinese leaders and economic planners know they've got to keep more than a few hundred million people happily employed. They will likely maintain 8+% growth and CAT is a big part of that.
One last point about CAT before we look at the S&P chart. I did not listen to today's conference call yet so I don't know how good their outlook is for the States. But, with the recent strong housing data confirming a healthy bottoming process, CAT will likely be growing again here.
Plus, look at the machinery and power equipment needed for America's exploding oil and gas exploration projects. This is another domestic growth area for CAT.
We will get hiccups there in the 30% growth of "fracking," especially after the earnings miss story we got from Carbo Ceramics (CRR - Snapshot Report) today. But it looks like their problems are company-specific since they were overly focused on dry gas extraction and not the high-demand areas with natural gas liquids (NGLs).
Since I own and trade many stocks in this field, including Kodiak Oil & Gas (KOG - Snapshot Report), Flotek (FTK - Snapshot Report), and EOG Resources (EOG - Analyst Report), I have some more homework to do here.
The View from the S&P Weekly Chart
Okay, let's talk about why all this still doesn't mean the market should go higher, and why or why not.
Yes, the market may be "over-extended" by many technical measures. But I believe that those calling for a correction (10% or more downside) are likely to be as disappointed as those who think we will surge through S&P 1,350 soon. I think the chart argues for a sideways trading range now between 1,250 and 1,350.
The likely resistance up top is formed by the head-and-shoulders top we formed in the first half of last year. Unless the global economy suddenly starts growing at greater than 4%, getting through there will take many tries.
And the likely support down below at 1,250 is formed by lots of healthy price action that happened in the fourth quarter to get us through there. This is a weekly chart where I converted your standard 50 and 200-day moving averages to their 10 and 40-week equivalents. There will be support where they just crossed positive around 1,255.
I am looking for one more surge higher in the next week to really test 1,340-50. I would lighten up some of my longs there and then look for better bargains on the ensuing sell-off.
Maybe it won't be this easy and the selling will start sooner, say after Friday's GDP data. Either way, I think we can confidently trade the range between here and there till April.
Kevin Cook is a Senior Stock Strategist with Zacks.com