Trying to Put Things in Perspective - P3 or not P3

While I do agree with the main idea that P3 will retrace 50-62% of the rally off the March lows, it is also a matter of when that retracement will be complete. That retracement will probably be the next best buy opportunity.

So far this rally is following the playbook for a typical recession/recovery scenario and I am keeping in mind that it will likely do so until the "Market" is convinced that stocks either reached their full valuation based on future expectations of the strength of the recovery. Barring any unforeseen events, S&P should continue to rally into early 2010 to the 1150 level after October earnings season is over if earnings expectations hold up and especially if they are revised upward again. Markets can and usually do trade in a range of +/- 10% (or more) from the midpoint of fair valuation. So, to see the S&P puillback to 1000 or a little less by late October would be perfectly normal and should not be looked at as the beginning of P3 unless the earnings outlook deteriorates or currency issues arise (which I do not expect to happen ) for example.

So, yes, while I agree that P3 will retrace, it is a matter of how high the market goes first. If 1150 is the final top, then that retrace will likely be back to around the good old 875 level, the breakout point of the V-bottom. Any retracement can take various shapes, and the normal list bearish arguments including "W" shaped recovery, more housing forclosures, etc., will have an effect at some point. There is not doubt that more housing foreclosures will have a negative effect on related sectors, that alone will not be the catalyst for a steep retracement anytime soon. It is too early to call a "W" recovery with LEI's still pointing up. The unemployment/jobs outlook, although bleak, is still in the very early stages of a possible recovery and the market is likey going to wait until the 4th quarter of 2009 at least before throwing in the towel on hopes for an improvement there. Emerging markets are also expeted to continue to be the growth driver for the gloabal recovery. So, I expect the energy sector to help support the earnings outlook for the S&P, while high expetations for an earnings rebound in the consumer sector could be dashed and end up being a dissappointment and drag.

To sum it up for now, I will not be too quick to throw in the towel on this market rally, be it a Bear Market Rally or otherwise and plan to use any coming weakness to add to some long positions and start new long positions in energy and Emerging markets.

more to come .......