In mid-May, the S&P 500 closed at lows of 884, 883, 887 and 893, before resuming its advance and coming to within shouting distance of 950. This, in turn, is relatively close to what I think is a reasonable goal of 1050 or so for the S&P at yearend.
From that point, the market has dropped back to the area it explored in Mid-May, closing yesterday at 893. So it’s very encouraging to see the market bounce off that level again. Let’s not declare victory, though, until we see how the day ends.
Industry orders for durable goods rose again in May. New machinery orders were up sharply and demand for both computers and raw materials was also strong. My guess is that this isn’t all a reflection of end-user demand. I think some of the strength is manufacturers restoring inventories that they cut too sharply during a period of panic around the end of 2008. In other words, I think the market is reacting to the tone of the news rather than the specific content.
Why is this important? If I’m correct, it suggests we’re still in the very early stages of the rising market–that investors understand it’s too soon to be analyzing the numbers too closely and are looking for confirmation of the thesis that the economic world is gradually healing itself. Then their idea, which I think is the correct one, is that at some point in the next six months or the market has the potential to begin to produce very large positive earnings surprises. That possibility alone is enough reason to remain fully invested, with a pro-cyclical tilt.
In support of my idea that what’s going on in the markets is half technical, half concept, I think it’s telling that no one is paying much attention to the fact that the OECD has revised up its economic forecast for this year and next.