What a (mini) Rally!

After starting the day down 30 pts on the S&P, a slow and methodical trudge uphill all day, combined with a late hour spurt took the S&P into POSITIVE territory for the close on Tuesday. Not only did the S&P break the psychologically and technically important 1045-1050 barrier but then it bounced and recovered from it safely into 1075 territory -- with spill over taking it into 1080 range this morning.

Is the coast clear for a bullish bounce after a 10% correction?

Maybe but the cards still lean more towards no at this point - although the market's resilience is very encouraging. Here are the reasons why: (1) there is a difference between liquidity and solvency; and (2) a 2nd half slowdown continues to be a real possibility for the US economy.

LIQUIDITY V. SOLVENCY -- the European TARP calms some nerves about sovereign debt problems by ensuring that debt payments will be met by Greece, Spain, etc. It was these same nerves and fear that helped cause the recent correction. So as the nerves subside, so should the fall. But it must be noted that while liquidity has been ensured, default and bankruptcy is still very much in the picture for these companies -- granted that won't happen till later down the road -- but the fact that the solvency issue remains could well cap any bullish run back to the 1200 range. And let's be honest, those concerns are very legitimate - there isn't must trust in Greece, Spain, etc to implement serious cost-cutting and austerity measures. If they don't, default is certain.

2ND HALF SLOWDOWN -- it was reported yesterday that the stimulus added 4.2% to GDP in 1st Quarter 2010. Great news for democrats politically to support their efforts! Horrible news for the economy. Take away that 4.2% and you have a recessionary economy. So as the stimilus begins to fade, its expected that growth too will fade from 3.2% in the 1st half of 2010 to more of a 1.5-2% pace in the 2nd half. That's still growth but not growth that supports large market gains. That's "invest in corporate bonds" type of growth. We'll watch the economic reports that emerge to see if the slowdown trend continues but this mornings durable goods report supports it -- sure orders jumped big time but it was on the back of aircraft orders. Take those away and durable goods orders (the crux of manufacturing, which has led this recovery rebound) actually FELL -1% in April.

So you have to wonder, will the market teeter in this 1070-1100 range only to eventually make another run at 1050 down the road? It's possible and while not certain, I believe its more likely than a run to 1150 as of right now.