Back to the stock market. As shown in the table below, the major US indices have moved to within spitting distance of the important 200-day moving averages and the early January highs. On the downside, the levels from where the nascent rally commenced on March 9 should hold in order for the upward trend to remain intact.



The Bullish Percent Index, showing the percentage of S&P 500 constituents that are currently in bullish mode as a result of point-and-figure buy signals, has increased from 1.6% in October to 12.8% in March to the current figure of 74.8% - a positive, albeit short-term overbought figure.

The number of S&P 500 stocks trading above their respective 200-day moving averages has increased to 47.8% from almost zero in October. This is a lagging indicator, but for a primary uptrend to be confirmed the bulk of the index constituents need to trade above their 200-day averages. (The 50-day reading is now 91.0% - the highest since October 2006 and calling for at least some consolidation of the recent gains.)

Adam Hewison of INO.com prepared a short technical analysis of the S&P 500’s most likely direction and important chart levels. Click here to access the video presentation.

On the question of whether this is a suckers’ rally or the real deal, Société Générale’s co-chief strategist James Montier weighed in on the subject in his latest investment newsletter (as discussed by FT Alphaville). He said he didn’t have a clue and was therefore buying insurance to protect on the downside. “Two methods of insurance stand out. Either I could buy index puts (relatively cheap at the moment) or I could construct individual short positions,” added Montier.

“Be careful about jumping into the stock market with both feet after this monumental rally. Consider whether or not it would be more appropriate to take advantage of the run-up to reduce equity exposure,” Merrill Lynch’s chief North American economist, David Rosenberg, wrote in his final missive (as reported by Barron’s) ahead of his previously announced departure from the firm.

Jeremy Grantham’s (GMO) take on the stock market outlook is summarized in his recent quarterly newsletter, in which he says:

“The current stimulus is so extensive globally that surely it will kick up the economies of at least some of the larger countries, including the US and China, by late this year or early next year. (This seems about 80% probable to me, anyway.) Anticipating this, we should expect a stock market recovery -- which normally leads economic recovery by 6 months, plus or minus 2 -- sometime between 2 months ago and, say, August, which the astute reader will realize implies that this rally may already be it.”

In my assessment, and as written in a post last week, the thawing of credit markets and the return of confidence augur well for the outlook for equities and provide further evidence that US stock markets are mapping out a base development formation. The early-January highs and 200-day moving averages are the next important targets, and a break above these levels would signal the completion of the base formation and a secular bottom (as has already been seen in leading markets such as China and Brazil). Only then will the corpse of the bear be put to rest.

Meanwhile, the speed and sheer magnitude of the rally argue for markets to either consolidate or retrace some of the past 9 weeks’ gains prior to moving higher.