Rally? Where?

There has been much talk in the past few days about the S&P 500 (SPX here illustrated with the S&P Spyders SPY) having its best 1st Quarter in 5 years. Oh Boo On That Talk! The SPX may have had its best "first 11 days in 5 years" but the rest of the time the market more or less churned in place. What do I see when I look at this?

1. A market that did what markets often do, which is to have a fairly substantial move in a short period of time. From the end of the year (horizontal blue line) till January 11, the SPX went up almost 4 %. If you annualize that kind of advance the market would be up almost 90% this year. That's not going to happen!

2. Since January 11 the SPX has returned approximately .40%. That's 4/10s of 1% in about 3 trading months folks. That's 1.6% annualized. Stocks have essentially been basing and largely trendless in their direction. If we look a little further back, the SPX is also only up about 2% since the middle of December. This is because stocks experienced a moderate decline in the last 10 trading days of 2005, probably due to end of the year trading issues which the market largely made up at the beginning of the year.

3. There has been a lot of churning among sectors and industry groups but no real substantial progress in the past 4 months for the overall markets.

I think that you can interpret this data in either a postive (Bullish) or negative (Bearish) manner.

4. Conclusions To Be Made- Bearish: A negative way to look at this is that the markets are in a topping phase with the smart money selling into most rallies and switching to more fixed income type securities because interest yields have become much more competitive in the past 2 months. This bearish view would also take note of the fact that the Federal Reserve has given no indication that it is done raising interest rates. It could be further bolstered by political uncertainty upcoming in this year's elections and by the statistical fact that May-October tend to be a weaker period for the equity markets.

5. Conclusions To Be Made-Bullish: The bulls could point to a market that in the past 6 months has had a lot thrown at it while continuing to press higher. This market has absorbed Katrina and higher gas prices. The overall economy continues to expand and corporations' balance sheets are in pretty good shape. Some of the geopolitical concerns (Iran for one) have pulled back a bit this year. A break or two in Iraq could really set the table for a good run later in the year. The Fed's actions in raising interest rates have only had the effect of harnessing a bull that might under other circumstances be ready to ramp.

6. My Take: I don't know which way the market is going to lean and I don't really think anybody else does either. The indicators that I follow show that stocks are in the aggregate overbought but not in areas that signal impending danger (i.e a crash of some sort). Absent some unlooked for event I think that it is best to stay the present course for portfolios. That can generally be defined as searching for pockets of undervaluation in attractive market sectors and keeping a bit more cash than normal in portfolios as a hedge. It also means constant monitoring of what we own for clients for hints that either the bulls or bears are going to hold sway in the coming months.