The fundamentals are well known: unemployment is high and rising; earnings and guidance are trending lower; inflation is modest; credit markets are improving but still constrained. How do the technicals look? Unfortunately for the market bulls, not good. Three technical indicators or hurdles would have to be mounted for the view from here to turn bullish.
First, although the Dow has rallied off it lows near 6,500, it's still within the range of a one-third correction from the 9,000 high at the start of 2009. That means the rally could be just a correction in a downward move, a classic bear market rally.
Second, the Dow's 50-day moving average -- the second toughest moving average to break -- is at 7,728. The Dow needs to close at least three days in a row above this key resistance level, and exhibit signs that it can stay above it, for a bullish indicator to be generated.
Third, our old friend, Dow 8,000 -- over which financial institution bulls and bears waged a five-month war -- must come back into view. If the Dow can close at three days in a row above 8,000, that would be another bullish sign.
Market Analysis: Therefore, the view from here argues that the Dow needs to overcome three technical hurdles -- break through a correction zone, remain above the 50-day moving average, remain above Dow 8,000 -- for the risk/return ratio to be indicate it's time to redeploy capital. Until then, stand aside and let the buyer beware.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds, PHDAX and PYMAX.
