Opposite and Equal

There are so many cross-currents in the market right now, an equally compelling case could be made near-term for both the bear and bull camps.

Let me give an example. We are at war in Afghanistan, Israel has basically declared war on Arafat and the PLO, Enron (ENE) has declared bankruptcy and we are approaching the highly dreaded fourth-quarter earnings preannouncement season. With all that, stocks are basically holding up pretty well.

The Bear Case: It's just a matter of time before stocks retest their lows. The fundamentals remain horrible and should continue to be weak for the next couple of quarters and maybe even years. Valuations are back to extreme levels and tech stocks are rebuilding the bubble that existed a couple of years ago.

The Bull Case: The seasonal pattern this time of year is strong and there is more than $2 trillion on the sidelines waiting to come into the market. We are winning the war in Afghanistan and the higher valuations reflect an inevitable economic recovery next year, given the unprecedented Fed easing throughout the year.

Both cases have been overly simplified, but both make sense. The bear case is valuation-driven, while the bull case is liquidity-driven. Nothing new there!

What is new is that both camps are right and the market is telling us that at least for now, the two views are canceling each other out. Over the past two-plus weeks, I have been looking for a period of consolidation where a trading range environment could develop that would allow the market time to work off its near-term overbought condition.

Looking at the charts below, it seems that the market action is signaling no real reason to change that view. A 5% pullback from current levels would do little to break the near-term trend and would potentially create the right environment for the next move higher.

The S&P 500 This may be first index to work off the overbought condition

Source: Baseline

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The Nasdaq Composite Index Time for a pause in upside action

Source: Baseline

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The Dow Jones Industrial Average A little more pullback should be expected

Source: Baseline

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