Given the market's recent weakness, it's good to see today's strong rally. The bull market that began in March 2003 is still intact as the S&P 500 continues to set higher highs and higher lows. Although the index is below its 200-day moving average, it has broken below this level and rebounded back several times during this bull phase. So on a technical basis, the market still looks good. In fact, the S&P 500 will have to close below its October 2005 low of 1176 to break this trend.
Today's rally is being credited to the positive earnings reports issued by Morgan Stanley and Federal Express. Of course, all rallies and sell-offs must be credited to or blamed on something. However, we really won't get a firm handle on what corporate earnings look like until the third week of July when second quarter results start pouring in.
On a fundamental basis, I'm still concerned about the market's overall health. I continue to focus on the Big 3: interest rates, energy prices, and housing. The Fed is still pushing through rate increases, energy prices remain stubbornly high, and the housing boom continues to fizzle. The combination of these three factors is what really worries me. Yes, stocks are way up today, but so is oil. Right now, it's up about 90 cents per barrel. Gold is up, too--about $10 an ounce. The yield curve is inverted between two and 10 years, and the 30-year bond is yielding exactly the same as the two-year note. These are not encouraging signs. Neither is it encouraging to see that the best performing stock year-to-date in the Dow Jones Industrial Average is General Motors, a company that lost more than $11 billion over the past 12 months.
The Fed makes its next announcement regarding interest rates on June 29. Almost everyone expects another quarter point hike. As usual, however, what the Fed says in the statement is what will really move the markets. Any indication that further rate hikes will be needed to fight inflation could result in a sell-off.