This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Market Preview: A Rally on Stilts?

Stocks in this article: DIS PCLN OWW SPY ^GSPC ^DJI

NEW YORK ( TheStreet) -- The schizophrenic summer continues.

The major U.S. equity indices are all now up in three straight sessions, while last week began with four down days. The overall trend since early June is positive, of course, with the Dow Jones Industrial Average, S&P 500 and Nasdaq back at their early May levels and within shouting distance of their peaks for 2012, but investors looking for substantial upside from here may risk getting greedy.

The analysts over at Bank of America Merrill Lynch have been arguing for a while now that the mega caps will outperform in the hot weather months and that call has been born out but the firm does see some question marks lurking in the technicals.

"This rally could be on stilts," the firm said Tuesday. "Bearish divergences also known as negative divergences are popping up all over in terms of price momentum, breadth, volume and in leadership indices failing to breakout (R2000 Russell 2000 , MID S&P Midcap 400 and Dow transports). This can persist for weeks, but if not reversed this could signal that a pending correction is likely in the month of September."

In the near-term, B of A sees a test for the rally when the S&P 500 reaches the 1400-1425 level and thinks a test of the May 2008 peak near 1440 is possible. The firm puts key support on the downside at 1325.

The S&P 100, which contains the 100 companies with the biggest market caps in the S&P 500, is up more than 14% so far in 2012 vs. the S&P 500's 11.4% appreciation and B of A thinks more outperformance lies ahead.

"We view Mega Caps as the new market leadership," the firm wrote. "Mega Caps represent: Growth, Quality, Yield and Big Bases. The sectors benefiting are Staples, Health Care (primarily pharma), Technology, Discretionary (primarily media) and Telecom. Many of the stocks in the Mega Cap space remain under-owned by institutional investors. Additionally, nearly half of the stocks in the S&P 100 have a statistically significant short position showing investors are fading their rallies. This is contrarian bullish, in our view, as investors don't believe in the rally."

1 of 3

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,778.15 +421.28 2.43%
S&P 500 2,061.23 +48.34 2.40%
NASDAQ 4,748.3960 +104.0840 2.24%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs