- Stocks continue the rally, fending off an afternoon seller attack.
- Japanese industrial production rebound excites some that an economic recovery is coming.
- Spending more to reduce the deficit. No wonder we cannot strike a deal on the budget.
- Quarter end, QE 2 end could mark the end of the relief rally.

MARKET SUMMARY

Stocks put in another upside day, managing to fend off some sellers.

The Greece austerity vote was a go ahead of the open, and after it came across some strong futures trade whittled their gains on some ‘sell on the news’ profit taking. That did not last, however, as stocks opened higher and rallied into lunch.

Was Greece the real focus? Some import, but not the only game in town. Japan reported the strongest rise in industrial production since 1953. Great news for the beleaguered economy, but let’s face it, the country virtually shut down since the combination earthquake and tsunami. ANY improvement in production would likely be the best in 38 years given where it was starting from.

Don’t want to downplay this too much; it is good news. Still, it does not warrant calls that the entire world will storm back from this slowdown and surge higher. PARTS of the world might be strong, but not the US. Current US policies, regulation, and spending destines the US economy to be subpar for years to come. There will be spurts higher as seen in late 2010, but no steady, quarter after quarter of strong growth seen when we had our debts under control and policies that empowered small businesses to create new technologies and services that create new high end jobs and raise our standard of living. The fastest growing job sector the past two years is government, and contrary to Keynes’ theories, taking money from those making the economy work and giving it to government workers does not create wealth or economic strength. Without the US as the traditional frontrunner, the entire world economy will not be what it was.

Of course things are not going to change soon. Wednesday the President renewed class warfare with another partisan speech casting companies and the ‘rich’ as the villains and the ‘poor’ as victims of the rich. It is clear he feels if you are rich you became so as a result of harming a less fortunate person. The answer is not to take money from the rich person who worked hard and made the American Dream work and give it to others; the answer is to establish an environment that allows everyone to rise to their level of success.

How can you conclude that you can reduce a deficit by spending another $2T+? That is exactly what is proposed by increasing the spending limit and increasing taxes. It is patently illogical to talk about your budget cutting spending and reducing the deficit when your budget spends another $2T. Until this fundamental disconnect in logic is understood there is no hope of bringing the deficit into control.

It was good to see Japan bouncing back. Kudos. That does not, however, mean the rest of the world surges higher at remarkable levels. Too much optimism. Even the Dallas Fed President said US economic grow could possibly hit 4% in the second half of 2011. It could, but that will require a big turn and the numbers and the trend don’t support it. It is understandable given how bad things are; people want to cling to something. That does not make it reality.

But I digress.

Stocks started higher and rallied into lunch. Good moves but not great moves as on Tuesday. The sellers attacked over lunch and put some serious dents into the session’s gains. Looked as if the rally was running out of gas. Stocks reversed and recovered, however, holding most of the session gains.

NASD 11.18, 0.41%; SP500 10.74, 0.83%; DJ30 72.73, 0.60%; SP600 0.37%; SOX -0.09%.

The sellers took their shot and it did not work. Another win for the buyers. Still, the sellers did show up for the first time in a couple of sessions, and that suggests the rally is a bit thinner as the oversold condition is worked off. The gains were less as you can see; some momentum waning.

That keeps us looking at Thursday as a key market day for this rally. It is the end of Q2, the end of QE2, and the technical reason for this rally is being fulfilled. Another good upside push to end the week could be the cue for the sellers to move back in.

THURSDAY

Wednesday the stock market showed some strength as it managed to recover from a pretty serious move by the sellers in the afternoon session. On the other hand it showed some new vulnerability as it has to recover from a pretty serious move by the sellers in order to put in gains on the session. Good that it recovered but the sellers have showed up again.

Thursday marks the end of Q2 and QE2. We have looked for a relief bounce given the intensity of the selling, and the market is putting that in, rallying nicely the past three sessions. One of the reasons for the rally is quarter end and some window dressing. When the quarter ends that begs the question whether the rally continues.

The index patterns are still not solid. While they still have room to run upside as discussed in the ‘charts’ section, given the end of quarter and the rebound rally into quarter end, it behooves you to be a bit careful and if a fade starts, protect positions.

Thus on any further upside bounce look to take some profits off the table. We have already started taking some on this rally, and a fourth upside session may be just too much for sellers to resist. You already know they are out there; saw them reappear Wednesday. If this is truly just a relief bounce, four upside sessions may be all of the gas in the tank whether or not the indices reach the next resistance levels outlined above.

Any further upside buys here is problematical. Depends upon what the market shows. Some patterns are very solid, representing good risk/reward positions. With the market having bounced off support for three solid sessions, however, the overall risk/reward is not as great. Therefore we plan to use any further rise as an opportunity to take gains, and if the market starts to stumble, then take laggards off the table, and to look at some new downside positions. If the market continues higher, cool. We let our positions run and then look for the next entry point for more upside.