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We continue to be bullish on the market and maintain our price target of 2350 for the S&P 500 (currently 1954). Yesterday’s selloff was probably nothing more than the market being a bit overbought and due for some profit taking. Overall the markets have been grinding up with no really bad news to stop the rally.
There is still a great deal of cash sitting on the sidelines; any short term selloff could be an opportunity for some of that cash to come back into the market. This past week we have also seen ETF money flow out of equity and into fixed income. This is probably more due to the market being overbought than any major allocation shift.
On the equity side we see flow into small and mid-cap stocks. Even though much of that could be an allocation from Good Harbor, it is still good to see – large-cap stocks alone can’t lead the bull market alone. We have also noticed that countries are buying stocks. This could further push up valuations, frustrating fundamental analysts, and ultimately leading to a bubble.
On the downside we see support on the S&P 500 at 1930 then 1919. The index could drop all the way to 1854 without doing any major technical damage.
Today’s GDP number was a bit troubling. We are worried that the low job participation rate and the fact that real wages haven’t really budged since the 1970′s could put a real drag on the economy. We also would not be surprised if the GDP number and other issues with the economy lead the Fed to a longer intervention. This could also mean that instead of eventually selling off their balance sheet, they let the bonds expire instead.
While we do see a compelling argument for higher interest rates, perhaps 3 – 3.25% on the 10-year Treasury (currently 2.54%) we see a more compelling argument for the 10-year Treasury going to 2.25% and staying in a range between 2.25% and 2.75%. The bull market in bonds may not be over yet.
Going forward, gas prices could be a significant drag on the economy as the Middle East seems to get messier by the day. Regardless of U.S. drilling, most of our refineries are set up to process Middle Eastern oil into gas. Result – turmoil in the Middle East directly relates to prices at the pump.