In a recent market strategy meeting, two of my top advisers (Reity and Sheraz) had similar ways to describe their outlook for equities in the first half.
One said we could be in for a slow 'melt-up' where the market appears to do nothing but chop back and forth every day, but after a couple of weeks you notice you are up nearly 1% and by the end of the quarter you've tacked on 3-4% in gains. The other spoke of a slow 'drift' higher as strengthening US economic fundamentals and stability in Europe kept stocks attractive.
I am starting to believe them. Just look at what the market has done for the past two weeks. I thought we would get surges higher as fund managers felt underinvested amid lots of equity values. Instead, we got one explosive move to start the new year and just a lot of back-and-fill since.
I was even betting on the Russell 2000 to catch-up to big caps and it has, with the RUT index sticking its neck back above 770 to inch out its October highs.
In my S&P 500 chart above, I drew some rough trend lines around a pattern that is obvious to most technical traders: the rising wedge. These low volume excursions higher typically stall as the apex of the wedge narrows.
In other words, there's not much meat on the bone of the current leg up. Given all the good news globally, I thought we'd get a decisive rally this week above 1,300. That may have to wait until next week, after a trip back down to 1,275.
Either way, I am a buyer. Because it looks indeed like a market that will merely grind its way higher. Mr. Market will fool the bears and other doubters by tempting them to short, or stay on the sidelines. And that's not a bad way for bulls like me to make money at all.
Kevin Cook is a Senior Stock Strategist with Zacks.com
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