Testing the June highs--again

07/22/2009 5:49 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Looks like the stock market is thinking about taking a rest.

As I noted way back on July 15 in the first column I wrote for this blog, "Why rallies fail," I don't think any rest is going to be a long one--there's too much money on the sidelines aching to get in. But it does look like some of the sectors that led this advance are getting a little tuckered.

The problem is that you can only rally so long because  earnings are better than the dismal numbers Wall Street was expecting. Eventually, you need some real growth. You remember growth don't you? When revenue went up so that earnings went up and not every penny of earnings growth didn't have to come out of cost cutting?

Well, in the absence of real growth--and besides Apple (AAPL) we really haven't seen much real growth this earnings season--investors don't want to get too far ahead of the economy.

Especially in those sectors that have rallied hardest on news that was "less bad" than anticipated.

Right now the Standard & Poor's 500 is right around the 946 level it hit at the close on June 12. That marks the top of that rally. In the short term I'd expect to see a little backing and filling around that level as the market digested its recent gains and as the investors who hav e money on the sidelines try to decide if they want to sit out August at the beach without worrying about stock prices at all.

We could get a little more than "backing and filling," of course. Looking at the sectors that led this rally, they each look more exhausted than the S&P 500. The financial, industrials, materials, and energy sectors that all contributed to this move haven't been able to challenge their June highs. They are all, as of July 22, hanging below those levels, an indicator that the investors who made profits on the rally in those sectors aren't inclined to let their profits ride and to follow those gains with new money.

I think that kind of caution is understandable in an economy where the good news is that things have stopped getting worse. Investors know that there's a long trip from " not getting worse" to "getting better"  and seem determined not to get too far ahead of an actual recovery that could be delayed as late as 2011.

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