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Afternoon Thoughts


There have been two schools of thought through this rally back to the upper end of the trading range. One camp sees an economic recovery that allows the market to blow right through the upper end of the range and the other camp thinks growth is likely to slow, putting further pressure on profits and causing stocks to move quickly to the lower end of the range and possibly below. Two wildly different opinions using the same information... hmmmm.

I think Brian Reynolds' comments help put the fundamental issue into perspective. Brian's been talking about the corporate bond market long before the Journal put it on the first page of the Money and Investing section. Basically, his anlysis of the corporate bond market is showing what my work is showing -- that the market is in a trading range. He comes to this conclusion because spreads have tightened from near-panic levels, but are quite a bit away from the all-clear sound. The way I read it is that just because something doesn't look like it is going to zero doesn't mean it is going straight up -- I agree.

On a different note, all of my technical indicators agree that a break through the upper end of the trading range outlined in prior articles appears unlikely on this leg of the advance. That isn't to say that the market can't go higher, just that a sustainable move though the upper end seems unlikely. Again, I fall back to the 3M (MMM:NYSE) example where the stock clearly broke out as a price and relative strength leader ... then totally failed because there was no fundamental confirmation of the move. It is possible that the major equity indices do the same.

As a result of the strength of the move, shorting doesn't make a lot of technical sense -- but neither does the "fear of missing" purchase trade within earshot of the top of the range in an overbought market. The purpose of this morning's article was to show that if the various market indices get to the upper end of the range (or even temporarily above), which would offer the greatest gain from current levels to that point.

This market is up quite a bit from the lows, and as a result the risk/reward has changed and in a trading range it is important to remember that in an overbought market, traders look for reasons to take profits -- especially when long-side profits have been a pretty rare commodity.
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