Kass: The Little Market That Could

Short term, the market outlook will be importantly influenced by investor psychology and the degree to which public policy translates into economic traction.

In marked contrast to early March, when we were in a bull market for pessimism, today (as evidenced anecdotally by some breathless and relatively newly minted bullish commentary from previously bearish strategists, money managers, contributors on RealMoney, the "Fast Money" crew and elsewhere) many have recently come aboard the stock market's love train and have turned more constructive:

• Sentiment surveys indicate a pickup in bullish sentiment.
• The McClellan oscillator is way overbought.
• RealMoney's Harry Schiller pointed out that the downtrend line for the S&P from the November 2008 and January 2009 highs shows resistance at 850.

Importantly, my early March variant view is no longer so.

The consequences of worshipping at the altar of price momentum can be punitive to the recently converted. One has to look no further than the recent downturn in gold shares and in the metal commodities, both of which became overowned and overbought asset classes.

Several other fundamental and technical factors could conspire to contribute to a period of market uncertainty and a healthy several months of backing and filling.

• First-quarter earnings reports will be poor and guidance mixed to bad.
• The success of the Federal Reserve programs, which seek to ring-fence toxic bank assets, will not be known for a few months.
• A still levered and "tapped out" consumer could pause in its spending (after demonstrating sequential improvement in the first three months of 2009), even despite the benefits of lower interest rates and massive fiscal stimulation. This could jeopardize GDP growth forecasts, delay the domestic economy's recovery and result in even lower-than-expected corporate profits in 2009.
• Capital raises (especially of a financial kind) may lie ahead. Already, the REIT industry has embarked upon an industrywide recapitalization.
• Interest rates are starting to rise, providing some competition to stocks.
• The always-present fear of an exogenous event.
• Volatility remains elevated.

Weighing against the near-term consolidation argument is the historically significant improvement in the market's internals and breadth of the rally, with six 90% up days in four weeks, reflecting an abrupt change from the fear of being in to the fear of being out and left behind.

Regardless of whether a near-term consolidation is in the offing, volatility will remain heightened, and my formerly implausible S&P forecast now seems plausible.

Similar to The Little Engine That Could, the U.S. stock market appears positioned for further progress, and my mid- to late-summer destination of S&P 1,050 remains on target.

I think it can ... I think it can.

Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.

---

Know What You Own: The most active stocks in Monday's midday trading included Bank of America (BAC), Citigroup (C), SPDRs (SPY), Ford (F), Direxion Financial Bulls 3X Shares (FAS), Financial Select Sector SPDR (XLF) and PowerShares QQQ (QQQQ). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

>To order reprints of this article, click here: Reprints