How High Can We Go?

The S&P broke through the old June highs with some force yesterday on the back of some better-than-expected earnings from a broad group of technology, materials, and industrial companies.  Whereas the rally off of the March lows was largely led by financials, this latest string of 8 out of 9 up days in the S&P (12 straight up days for the Nasdaq) has been much broader based.  With tech bellwether Microsoft down 7% in the pre-market, maybe its time to pause and reflect to see how much further we can go. The chart below shows that we have regained almost 50% of the drop over the past 12 months.  With 50% being an important Fibonacci level, 989 on the S&P will be a key point to watch.  A rally through that level will have to be respected and should drive further money from the sidelines and into equities.   From that point the next Fibbo levels are 1066 and 1160, which would bring us very close to pre-Lehman levels.  For that to happen we must start seeing a few things.  First, many of the earnings beats have been due to extensive cost cutting by companies (read: job cuts).  So while the bottom lines have bested rather grim analyst estimates, we have not yet seen the top line growth that would suggest the consumer is spending again.  Microsoft's top line miss is a case in point.  Until companies start to ramp up production in anticipation of higher end user demand, new job creation will still be negligible at best - and new jobs is usually the last thing to happen in a recession. So expect some churning, some backing and filling as we digest this sharp move up in equities over the past two weeks.  Keep reading our Morning Call for signs that the overbought indicators have unwound and that a move higher is now possible.  If anyone has any other predictions or thoughts, we'd love to hear them.   spfib