Stocks staged an impressive rally yesterday with blue chips climbing 2 percent and small caps up by 1.5 percent. The move, which again occurred on anemic volume, brings us smack dab in the middle of the trading range that we’ve been mired in for the better part of a year now. Getting back up toward the April highs seems like a real long shot given the economic backdrop, but at least for the short term the trend appears to be higher.

Credit for the gains went to optimism on the US economy, thanks to corporate earnings reports coming in and a better-than-expected reading on the Institute for Supply Management’s Purchasing Managers Manufacturing Survey. The Index came in at 55.3 vs. an expected 54.2. Of course that was still down from the prior month’s reading of 56.2, but in times like this investors will take their victories where they can find them.

There were no real victories today. Personal income and spending missed the mark. Factory orders were dismal, coming in well below analysts’ expectations. Likewise, pending home sales fell well short of forecasts. The most important data that will hit the wires this week center on the employment situation. Analysts are expecting unemployment to tick up to 9.6 percent, payroll growth to drop by 65,000 and average weekly hours worked to increase from 33.4 to 34.1 hours. The way the market is behaving we could see a big swing in stock prices either way depending on were the numbers actually come in.Read more...

What a difference a week makes. This time last week stocks looked to be on pretty shaky ground. On Tuesday the market opened and the S&P 500 dropped to 1060 and a close below that level would have likely resulted in a retest of the lows around 1010. Small caps stocks, which had been trailing blue chips, were likewise precariously poised. But instead of dropping, stocks rallied from that intra-day low and we’ve tacked on more than 5 percent. And the small fry have climbed even more.

We’re still not happy with the light volume, but the participation has been broad based, which is very encouraging. As for where we go from here we may know definitively in short order. Stocks are coming into overhead resistance right now. If we can manage to close above 1120, we could easily tack on another 2 to 4 percent and perhaps more if the US dollar remains weak.

That said, we can’t get too excited about the market’s prospects given the poor economic backdrop and lackluster forward guidance we’re hearing from many companies. Most likely we’ll remain in a trading range, with downside risk outweighing upside potential.

Among the most intriguing economic indicators right now is Economic Cycle Research Institute’s (ECRI) Weekly Leading Indicator. The good folks at the ECRI remain bullish on the economy’s prospects, despite a -10.5 reading on its Leading Indicator. However, in its entire history, a period spanning 7 recessions, a -10 percent or worse reading from the indicator has invariably heralded a coming recession.Read more...