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Breakout or Fakeout? The Case Against the Market Rally


It's the rally that just keeps on giving, defying all bears, and knocking down resistance levels with minimal hesitation. The S&P 500 broke above 1,400 for the first time since June 2008 to close at 1,402.6 on Thursday. The S&P is now up over 11% year-to-date, and about 12% below its all-time closing high of 1565 set in October 2007.

The only logical question plaguing every investor now is whether this rally continues.

"No it doesn't, just look at earnings alone," says Todd Schoenberger, managing director at LandColt Trading. "64% of S&P 500 companies beat their bottom line estimates, the historical average is 62%, and these are on lowered expectations!"

Schoenberger has several more reasons he isn't buying the sustainability of this rally, starting with the labor market.

The latest jobless claims reading fell by 14,000 to 351,000 last week, matching a four-year low. The 4-week average, which strips out some of the weekly volatility, came in unchanged for the week at 355,750. Meanwhile, last Friday the release of the February jobs data showed another sign of improvement with the economy adding 227,000 jobs —the 3rd straight month of +200K jobs added. The unemployment rate held steady at 8.3%.

Schoenberger acknowledges the improving trend, but favors quality over quantity. He says our job growth is of "low income variety," meaning we're adding low paying, mostly service sector jobs that do not increase household wealth enough to make a meaningful mark on consumer spending —the lifeblood of the economy. Further he says business owners aren't hiring and don't plan to until they have a better grasp on what the overhead costs will be; namely from Obamacare.

Another straw that will break the rally's back is the Federal Reserve.

"This was all a big ruse because we've been waiting for Ben Bernanke doing quantitative easing 3 (QE3)," says Schoenberger. "He came right out this week and said 'no I don't need to do that right now.' Where is it gonna come from? Where is the stimulus gonna come from?"

For more on Schoenberger's case and Macke's counter, check out the attached video and let us know your thoughts… Is the S&P 500's march above 1400 a breakout or a fakeout? Please comment below or visit us on Facebook.