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Is there a rally ahead?

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by Peter Switzer

The case for a rally is building but there are those who think another correction could follow that. On the other hand, some ‘experts’ see the market going up around eight to nine per cent by year’s end.

The simple story is that no one knows but so long as you have a long-term approach to investing in shares, we’re in a buying opportunity situation.

One concern I have is that the bond market isn’t exuding confidence in the USA and the smart guys often argue that the bond market is a better forward indicator than the stock market. My goal for the week is going to be to get to the bottom of this claim.

Over the weekend

That said I’m happy with the developments out of Europe. China’s economy is doing better than the bears would like and the leadership is talking about a more flexible exchange rate, which is a promising sign for the USA.

I also noted that gold hit a record high of US$1258.4 an ounce, which means the nervous Nellies are still out there. However, oil went above US$77 a barrel, which is a positive global recovery omen.

On Wall Street last week, the Dow Jones was up 2.35 per cent for the week, the S&P 500 up 2.37 per cent and the Nasdaq rose 2.95 per cent. And the VIX or fear index fell to around 23, which was up in the high 30s not long ago. Fear is subsiding, which is good for a pending rally.

Good news watch

Looking for good news and Caterpillar said dealer sales of heavy machinery went up 11 per cent in the three months to the end of May. That’s a good economic sign.

Best news of the week was that, by July, the key European banks will have their stress tests out for scrutiny. This helped the euro rise over the week.

Also on net, the indicators for the health of the US economy have kept me positive, though this was not a great week.

On the other hand…

Some US analysts tip earnings estimates for top companies are too high and will be pulled back, which the market won’t like. Also, jobs and housing – two important bricks in the foundation of an economic recovery – are not looking as solid as many economists would like. I still think we need a few more months before we can be conclusive on these subjects.

The week ahead

So, what will be the big stories for this week?

In the US, Tuesday brings existing-home sales, while Wednesday, we see new home sales and the Federal Open Market Committee interest rate decision.

On Thursday, there are durable goods orders and on Friday we see corporate profits, consumer sentiment and the final look at the latest US economic growth.

While no one story will make or break the market, it could be the net story – good news minus bad news – that could determine the market’s direction. Fortunately, the charts seem to be pointing to a probable upward move.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Monday, June 21, 2010