Back to the main question. Was the recent market move above 4,700 a breakout or a fake out, asks Steve Reitmeister, editor of Reitmeister Total Return?

The honest answer is to say that is “unknown and unknowable,” because there are no crystal balls or time machines to give us 100% certainty. However, we have to appreciate that either is highly plausible.

It is also important to note that the primary long-term trend is bullish. Let there be NO DOUBT about that, with rates still at historic lows and the economy improving rapidly from the devastations of Covid.

So in general, we want to lean bullish. And anyone getting too cute in betting heavily that stocks will go lower at this time is likely to look quite foolish. However, I suspect that the fairly big one-month move from 4,300 to 4,700 has taken some steam out of this bull for the near term.

That makes me suspect that more of a consolidation period around 4,700 is the most likely outcome. Maybe sometimes flirting about 1% above that mark. Or perhaps up to 2-3% below defines a likely consolidation range we could play in until the Santa Claus rally takes over, with 4,800 pretty much a certainty before the year ends. 5,000 is not out of the question.

The point is to stay bullish as any pullback would be short lived and shallow. But indeed, these consolidation periods come hand in hand with serious sector rotation that could easily trim 5-10% off your favorite stocks. That leads to a buy the dip mentality when the best stocks go on sale.

Now let’s turn to the recent economic data that continues to skew positive. That conversation starts with weekly Jobless Claims, which headed lower for the sixth straight week. In general, fewer jobs lost corresponds with more jobs gained that we will likely see on display in the monthly ADP and government employment reports.

On the manufacturing front we see the important regional report, Empire State Manufacturing, surge from a previously impressive 19.8 to an even more splendiferous 30.9. We need to see if those positive trends show up in the other regional reports over the next couple weeks to tip us off to what the likely result for ISM Manufacturing.

On the surface, one has to applaud the much stronger than expected Retail Sales report. From every angle this looks quite robust. That is the good news.

The potential bad news is that consumer fears of inflation lead early on to an increase in buying behavior to lock in lower prices. This surge in activity evolves into lower sales as demand is pulled forward.

Is that happening now?

Maybe. Maybe not.

Note that the investors had no issue digesting this news with stocks plowing ahead once again. But even if this negative version of the story was happening, we would be in the early innings of it being a concern for the economy. So, it's best that we keep our bullish posture for now, but keep our eyes open for any true signs of weakness that would make us more cautious.

Putting it altogether, we are in the midst of a long term bull market that is potentially experiencing another brief pause (consolidation) before building up the strength for the next run higher. So, continue to have a bullish bias with an eye to buying the dip on your favorite stocks.

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