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Ride Out the Short Term for the Next Major Market Surge

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The short term could be choppy, but the next major move is likely higher. Here's why.

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The fourth quarter is off to a fine start for the bulls, as the major market indexes shook off some early malaise to settle higher for the week. The Dow Jones Industrial Average (INDEXDJX:.DJI) even took out the 13,600 level on Friday and touched its highest level in half a decade. Stocks mustered these gains despite an increasingly stubborn and skeptical contingent that remains content to stay on the sidelines.

With indexes at or near critical historical levels on the charts, and as earnings season and a presidential election draw near, Todd Salamone outlines the bullish case from a short- and longer-term perspective. Also featured in this week's analysis:
  • Two technical levels to keep an eye on;
  • Three signs that hedge funds are still sitting out this rally
Notes from the Trading Desk: Eyeing the Four "Es"

By Todd Salamone, Senior VP of Research
"Alcoa kicks off third-quarter earnings when it reports on Oct. 9, and it's sure to be a lousy season. The S&P 500 companies are expected to report contracting profits, by about 2%, for the first time since 2009, according to S&P Capital IQ. That's certainly not a good thing for stocks."
-The Wall Street Journal, October 1, 2012
"...[H]edge funds are turning away from a rally in the global stock market. The ratio of bullish to bearish bets among professional speculators fell last week and is below historical averages, according to a survey by International Strategy & Investment Group ... Hedge funds make up more of the equity market after their assets expanded and individuals pulled record cash from US mutual funds."
-Bloomberg, October 5,2012
The four "E's" -- Earnings, Economy (a.k.a., the "fiscal cliff"), Europe, and Elections -- continue to breed uncertainty in the equity market. The ambiguity is translating into caution and hesitation on the part of major market-movers, such as hedge funds. With respect to price action, major indices are situated around all-time highs or multi-year highs, with small- and mid-cap indices -- such as the Russell 2000 Index (INDEXRUSSELL:RUT) and S&P 400 Midcap (INDEXSP:SP400) -- challenging resistance levels in the 850-860 and 1,000 areas, respectively.




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No positions in stocks mentioned.
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