Market Analysis for Jan 19th, 2004

All Roads Point Higher, But ...
By Mike Paulenoff,

Today the markets are closed for Martin Luther King's birthday holiday, but this extra day gave me an opportunity to further examine my intermediate outlook for the first quarter to half of the year.

Before I describe the charts, most of you should get your hands on a copy of this week's Barron's, which features the Barron's Roundtable. The cast of characters who provide their outlook are the same this year with the exception of Bill Gross from PIMCO, who is always interesting to listen to.

In general, regarding my outlook, what stands out to me is that Yes 2003 was a great year, better than anybody expected; No, no one thinks 2004 will be particularly as robust in the stock markets; and Yes, the same large problems that confronted policy makers, central bank governors and investors will be there in 2004 just like they were in 2003.

The problem is the indices are between 25% and 50% higher than they were last year, and the overriding problems of inflation or deflation, of consumer debt, of employment, of government debt, of trade deficits, of global growth, of the direction of the dollar -- all those large issues that could impact us as investors and which have to be grappled with by policy makers, they're there, too.

With the averages considerably higher than they were a year ago, does it stand to reason that the indices can leap again by 25%, to pick a number, and ignore the same problems that were confronting us last year?

We have an extremely intense stimulus-based recovery. Can this stimulus work through the system in an additional way to last another year? If it can't, then the piper will have to be paid, and the phenomenally bullish and powerful move we are still in from last March will at some point run out of gas like a Saturn rocket that hits its apex. Then the rocket goes a little bit further, but guess what, the boosters are gone and after it travels another certain percentage it starts coming down the other side of the parabola because there's absolutely no power to keep the rocket in forward motion.

With that as a beginning, let's take a look at the weekly S&P chart. What is clearly going on here, to me, is that 1177-80, which is 40 points or so above Friday's close, is the main serious resistance point that the market or the S&P cash market is heading for. That resistance area was created during the first quarter of 2002, exactly two years ago. And it looks to me as though there's very little reason technically why the S&P should not make a run of another 30-40 points in that direction, call it 1170-80, which is the next generalized higher target window for the S&P.

In effect, this run could happen very fast, and on a daily or hourly basis we could look back and say, "Wow, that was a vertical blow-off!" So it wouldn't surprise me if we went up another 40 points in the S&P very fast within several days, if not maybe two weeks, and at that point maybe even take out the three highs that occurred between the fourth quarter of 2001 and first quarter of 2002, blow away some stops at 1177-80 and carry over into what will be a significant peak for prices.

At that point we will have to re-evaluate what's going on, but as it fits in with the problems and liquidity issues we discussed earlier, it'll be interesting to see how far ahead of itself the market can get as the fundamentals try to catch up, election year or not.

In closing, let's just say this: It seems to me that unless and until the S&P breaks back down through 1115, all roads are pointed higher and all lights are green for a move that could be into the 1170-80 area.

For our subscribers, please keep an eye out on the Web site later today for a chart and additional comments.

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