The Standard & Poor’s 500 finally broke through the 1108 barrier that had stymied stocks for the last few days. The June intra-day high was at 1105 and the index’s 200-day moving average was at 1108 so today’s close at 1115 is definitely a positive sign.
In another year I’d say today’s advance marks the beginning of the summer rally, that traditionally favorable period for stocks that, in many years, begins near the end of June and stretches into July.
What worries me though is that this year the rally faces massive resistance just a few dozen points ahead.
It wouldn’t be surprising to see the S&P 500, once it had broken above the 200-day moving average, move to the 50-day moving average.
But that mark isn’t very far above the market’s June 15 close at 1143. That’s about 2.5% above the June 15 close.
And it wouldn’t be surprising to see the S&P 500, once it had broken above the June intraday high, climb to the January high.
But that mark is at 1150. That’s just 3.1% from the June 15 close.
Of course, stocks could climb to those levels and keep going. But that will depend on some major dose of good news. Something that demonstrates that the euro debt crisis is, if not over, at least less of a threat. Or something that demonstrates that Chinese banking officials, who have spent the last couple of days warning everybody who will listen about the state of the balance sheets at China’s banks, aren’t so worried anymore. Or something that says that we don’t need to fret about a slowdown in U.S. economic growth or the stubbornly high rate of unemployment.
Absent good news like that, I think this is most likely a weak echo of the bounce that we were expecting earlier to take the S&P 500 up to 1220. And it’s based on a recovery in the price of the euro that is itself just a bounce. (If you want to trade this rally, trade it quickly. The summer rally doesn’t last long in most years.)
Any kind of a rally isn’t anything to scorn, but I’m not getting too excited here. Especially because in most years the period after the summer rally is the worst of the year for stocks. And it often lasts, not just a few weeks in summer, but for all or most of August September, and October.