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Stocks for a Short-Term Rally

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (The FRED Report) -- Here at The FRED Report, we have been forecasting a drop into May, followed by a summer rally that could be quite strong. We have had the drop into May, and it looks like we should rally short-term, but there are some indicators that do not appear to be as positive as we would have liked to have seen at the end of May. This suggests a modification of our stance may be in order.

The main problem we have is that sentiment indicators, especially our % bears indicator, have remained stubbornly low. Normally the market has a strong, multi-month rally when % bears is in the 40% area, or even above. Now, the indicator remains in the 18% to 20% area. In addition, weekly stochastics on the indices have not come down enough to signal a strong buy. We like to see this indicator move below and above 20, as it did last July/August -- not just moving down through 80 as they are now. We show some charts below.

In terms of sentiment, we recently completed our monthly research report. Interested readers can email us for a copy of this report, as the tables are too big to fit into this article. The gist of the report is that in the last 39 years, the market has been higher by the end of August than the end of May for 24 of those years. Of the years when there was an extreme in negative sentiment, that forecast a decline half the time -- not a compelling number, but still one that suggests some caution on the next overbought readings we see is in order.

Should the market rally short-term, we think energy stocks will do well. Favorites in this sector include Chevron (CVX), Exxon-Mobil (XOM) and Rowan Companies (RDC). We show those daily charts below.

We think tech stocks should rally short-term, but caution that they seem less attractive longer-term. Stocks we like in the IYW are IBM (IBM) and Oracle (ORCL). These charts are more attractive than other techs on a medium as well as short-term basis.

To conclude, we see some intermediate-term problems in the stock market, but are looking for a rally short-term. We would use this rally to examine risk management parameters and prepare for a potential decline in the second half of the summer.

Fred Meissner is founder and publisher of The Fred Report. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report. A detailed bio is here:Fred Meissner.

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