Can The Hope Rally Continue? (DIA, SPY)

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hope Can The Hope Rally Continue? (DIA, SPY)

Markets rally on hope for a European settlement

Last week I wrote, “Today we stand at a most important crossroads for the global economy and for major U.S. stock market indexes like the Dow Jones Industrials (AMEX: DIA) and S&P 500 (AMEX:SPY).  The endgame in Europe appears to be at hand, and the successful or unsuccessful resolution of this crisis will determine the investment climate going forward.”

That perhaps is doubly true this week as European leaders meet in a two step summit on Sunday and Wednesday and global markets await the outcome.  The recent rally has been a “hope rally,” fueled by hope for a settlement of the European crisis, and if this is realized, we will likely see this develop into a strong seasonal rally into the end of the year.  If not, we are looking at the potential for an international “Lehman Event” and the associated pain that will accompany the unraveling of Europe.

On My Wall Street Radar

spx102311 Can The Hope Rally Continue? (DIA, SPY)

Chart courtesy of www.stockchartrs.com

In the chart of the S&P 500 (AMEX:SPY) we can see how the impressive rally of the last three weeks has broken through resistance levels and now the 50 Day Moving Average is turning up and the index is within 3% of the 200 Day Moving average (red line) that is widely regarded as the demarcation line between bull and bear markets.  The index is 8% below recent highs and that level could be recaptured if the 200 day moving average can be crossed.

So for now, this is a bear market rally that will live or die based upon the events in Europe.  Seasonality favors the continuation of the uptrend into the end of the year and technical indicators now point to higher prices ahead for the short term.
The Economic View from 35,000 Feet

The week’s news was mixed as earnings have been relatively positive with the exception of some major misses like Alcoa, IBM, and Wells Fargo.

Economic reports continue to show slow growth with the Fed Beige book confirming that, along with leading indicators and a positive reading from the Philadelphia Fed Index which jumped to +8.7 from a previously reported -17.5.

The bad news continues to come from Europe with riots in Greece and downgrades of Spain and Italy.  Contradicting the positive Philadelphia Fed Index, the Empire Manufacturing index showed continued contraction while China’s GDP growth continues to slow and the Shanghai Index is in a solid bear market.  Finally the Economic Cycle Research Institute’s index continues to forecast recession dead ahead.

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