Bulls fight back 

Stocks rebounded yesterday from Tuesday's sell-off.  This seems to be business as usual for this strong market and I guess we shouldn't expect anything less.  But playing devil's advocate -  again - the bounce came on lighter volume than Tuesday's sell-off, and from a technical standpoint, the S&P 500 put in a lower low and a lower high on the day. 


                               Chart provided courtesy of www.decisionpoint.com

That is still a downtrend but the index did find support at the 50-day moving average and did close near the day's high so if we see an open to the upside this morning, that short-term downtrend will be broken. 

Even though the market has consolidated for the last two months, the shallowness of the pullback makes me uneasy.  The steeper the rise in stocks, or anything that is traded, without a correction, the more room there is to fall once we do get a real sell-off.  If you didn't really follow the stock market before 2003 that may sound like folklore, but it's reality. 

I really like stocks from a fundamental standpoint and expect them to do very well by year's end, but consider that the bullish trend line of S&P 500 during this bull market, which began in early 2003, is currently sitting at 1300, or 14% below where we are now.  Not that the market will sink that low, but it certainly could and it would still be riding the 4+ year bull market.  There is support along the way, but strong support is evaporating.  The closest decent support area before 1300, is around 1450.  That's only 4% from where we are now.  Is that too much to ask? 


                               Chart provided courtesy of www.decisionpoint.com

For the market to continue to move higher and breakout to new highs now would just increase the problem.  The lack of a good base from which to launch, continues to leave that vulnerability.  It's like painting a deck without a good primer.  It just won't last.  But put a good quality primer underneath that paint, and you may be able to go a couple of years without any trouble.