The stock market continues to rally as we expected. The S&P 500 is up 7.6% from its early September lows and up 60% from its March 2009 lows. The 2004 lows near 1,060 did not present any resistance for the market. The current upside target for the S&P 500 looks like the 1,100-1,125 region. Yet stocks are short-term overbought and the rally looks tired.

We could be facing a real test of our theory that any pull back is going to be shallow. Many fund managers are down to their last six weeks before their fiscal year end and they will continue to chase performance since so many were under invested during the market's bounce. In addition to money on the sidelines looking to buy a dip we're also facing the potential for quarter-end window dressing as September comes to a close in just eight trading days.

I would still expect some sort of dip - probably toward the 1,040-1,020 zone in the S&P 500. Unfortunately, any immediate pull back is going to fuel another wave of bearish commentary that the market looks too heavy and has gotten ahead of itself. This past week I was reading opinions comparing the current market bounce off the March 2009 lows to the bear-market rallies of 1929 and 1938. At the moment the Dow Jones Industrial Average (DJIA) is up about 51% from its March 2009 lows. After the 1929 crash the DJIA soared 53% in just 22 weeks during spanning the last couple months of 1929 and into 1930 only to roll over again. Following the 1937 market crash the DJIA climbed 62% in about 31 weeks (into 1938) only to reverse.

At the same time there were some technicians pointing to the fact that the S&P 500 is now more than 20% higher than its 200-dma. That hasn't happened in the last two decades and the commentary suggested that the market is too overbought and a reversal is imminent. Do I think the current market rally is about to roll over? No I don't. I strongly suspect stocks will slowly trend higher throughout the rest of the year. Yet that doesn't mean we won't see minor corrections along the way.

You've heard it before. A bull market tends to climb the wall of worry. Believe me we still have plenty to worry about (just read my long-term outlook) but it shouldn't be a challenge until 2010. Be patient and pick your entry points carefully.

Chart of the S&P 500 Index:

LONGER TERM OUTLOOK

Comments from last week:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010. Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Two weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown