Two Views of the Market

Where is the stock market going? Tough question of course. After a difficult October-through-March, stocks rallied in April. In May – with one day left – stocks have held on to those gains.

Two views of the state of the stock market caught my eye today. They mostly contradict each other:

Jay Collins of DT Trading in Chicago says: “I still am sticking with the line that we are in a longer term bear market, and in the very early stages of it, as the easy credit period will take years to unwind, not months, and am currently in one of the periodic bounces that will happen within the bear move.”

Alexander Young of Standard & Poor’s (which, like BusinessWeek, is owned by the McGraw-Hill Companies) notes “the S&P 500 remains well off its March 10 lows of 1270.” Young doesn’t dismiss the trouble ahead, especially worries over consumer spending in the second half of the year, but he says earnings outside the financial sector are healthy and overseas revenues remain strong. Therefore, he predicts, the “March 10 lows will hold, and the current uptrend will continue, [though] we think it will remain choppy until more evidence of economic and EPS stabilization surfaces.”

In other words, Collins is skeptical of the recent rebound, and seems to believe it was a sucker’s rally. Young, however, is calling the bottom, doubting stocks can fall further than their March lows.

There’s a third possibility, however, which would make both Collins and Young at least partly right. Stocks could limp along in a narrow range here for months. With inflation looming, the financial crisis persisting but the economy limping along slowly, stocks could stay above their March 10 lows but not get anywhere near their October heights. The key question: How long are we going to end up waiting for a catalyst that really pushes this market in one direction or another?

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