The Market Rally: How High Can Stocks Go?

On the heels of yesterday’s 3% gain, stocks are taking a well-deserved breather. The Standard & Poor’s 500 closed had finally busted though 930 — a significant point of resistance. January’s rally died in the low-930s. And the recent upswing topped out at 929, before trading sideways for most of May. But on the first day of June, traders pushed the S&P 500 through the resistance to a 942.87 close, up 39% from the March low.

Thanks to today’s pause, we have time to consider what comes next. Back on May 11, Greg Trocolli, a trader and the author of a technical newsletter for Opalesque, thought the S&P 500 would head straight for 1000 if it closed above 939. Well, we’re above 939. Barring any unforeseen bad news (the bane of every technician’s existence), the S&P 500 should trade 1000 soon.

But can it break through? MF Global’s Nick Kalivas puts the odds at around 33%. Working against the market are, you guessed it, fundamentals. After posting the worst earnings in history, the market seems to be pricing in renewed profits. A sustained push above 1000 would also require a return to something like normal growth. “I’m skeptical it will develop,” Kalivas says.

Still, the rally’s resilience has taken many by surprise and there’s a relatively clear technical path to, say, 1100 or so if the S&P 500 breaks 1000. But we’re nearing the point where the smart money will be coming out and the dumb money rushing in. But don’t take it from me. “We believe…that the risk/reward ratio for new purchases has become dicey,” says Alfred E. Goldman, chief market strategist at Wells Fargo: “Despite our bullish stance on the stock market and optimism about the economy, we advise investors to be a bit cautious.”

Good advice, in any market.