Can Stock Market’s Summer Rally Persist?

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The stock market is defying doomsayers and showing a good bit of resiliency over the past week. True, it’s on low volume but the market is climbing nonetheless, rising 3.5% last week and then up about 1% on Monday. The Wall Street Journal even trumpeted the fact that the Dow is now in the black for the year–not sure whether this news warrants a cheery celebration or big roll of the eyes. Anyway, what’s filling the market’s sails is second quarter earnings. Sure, the 24% jump in new homes sales for June—not that big a surprise given that May was a horrible month—also helped, but it’s those rapid fire earnings reports, mostly beating analysts’ expectations, that are really powering the market.

Monday’s market action also holds a nice new development: Last week financial stocks were not really enjoying the rally, and that has caused concern among some market analysts. Mary Ann Bartells over at BofA Merrill Lynch suggests that  so long as financial stocks remain weak, the market’s corrective phase may not be completely over. The good news on Monday is that financial stocks were moving higher.  In fact, Bof A and Citi were both big gainers on the day. Another interesting development is that some of Monday’s strongest performers were companies that have not yet reported earnings, including Sprint and Office Depot, both up more than 7% on the day. This says that investors are scrambling to get ahead of good news (with Sprint, that probably means a smaller loss than last year) and that is a bullish bit of animal spirits…something we haven’t seen in a while.

With all these good feelings, be aware that the S&P is now hitting its 200-day moving average. Technical barriers are psychological barriers that can easily be brushed aside by a strong, motivated bull—but a tentative bull may get hung up. Watch these next few days carefully. If the broad market stops advancing or retreats it will likely be more than a breather, but if the S&P 500 powers through  1116 on strong earnings reports we could have one sizzlin’ August.