Enjoy the Rally but Cull the Herd

The other day, Cody Willard asked me if I was still short-term bullish.

As I mentioned last night, for a variety of technical reasons that I detail here, the answer remains yes. Indeed, my first-half price targets of 11,800 on the Dow Jones Industrial Average and 2600 on the Nasdaq, which looked pretty ridiculous when made in December, look more achievable than ever.

However, at the same time, the second-half 2006/early 2007 downside looks just as achievable now, if not more so. I detailed the specifics of that downside in the Cult of the Bear trilogy, so I will spare you the ugly details again. For today, let's focus on what's behind the near-term technically bullish setup for the market, and how and why traders might go about using that strength to adjust their portfolios ahead of what looks to be a weak second half.

Market disagreements often boil down to simple issues of timing. It's almost amusing to note the battles on Wall Street caused by people talking at cross purposes, when all they really are doing is looking at the market over different time frames.

The most peculiar sniping I've seen lately has been between economists and technicians. Each of these specialties digests different data and operates over widely diverse time frames.

Technicians tend to be focused on the most recent data generated by market action, often leading to near-term calls. After all, a break of support or a trend line doesn't require months to be proven. All that's needed for data on a closing basis is a day.

Economists are concerned with where the economy is within its broader business cycle. Their concerns play out over a time period of many years. While I have criticized the short-term failings of the dismal scientists -- this cycle has seen them regularly overestimate new job creation and constantly underestimate inflation -- I find some other criticisms of their work downright foolish. To imply their work is worthless (as I have read on this site) because the economy hasn't collapsed yet is to miss the broader point. The macro economy is not a stock that will drop 40% when it misses its quarterly number. It is a far more intricate and complex system, constantly subject to changing forces, developing over much longer time frames. To most traders, economic changes occur at an almost glacial pace.

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Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally. Other areas of research coverage also include consumer, real estate, geopolitics, technology and digital media. Ritholtz is also president of Ritholtz Capital Partners (RCP), a New York based hedge fund. RCP is driven by the analysis performed by Ritholtz Research. Ritholtz appreciates your feedback; click here to send him an email.