The Bull Case

The market has had a nasty two day spill and the odds favor some sort of a relief rally today. I have discussed the problems in Europe at length in recent days and today will instead focus on the bull case.

The best thing the bulls have going for them is that earnings have held up despite the economic weakness. Corporations have been using much of the cash they earn to repurchase shares and for cash takeovers, which helps markets. As long as this continues it is unlikely the market will see much downside and this could spark a year end rally. We have been seeing earnings reductions from the more cyclical companies, but overall earnings are holding up well, for now.

The other factors that favor the market are seasonality and investor positioning. We are headed into the strongest months of the year. Despite the fact that everybody knows about seasonality and markets are supposed to be efficient, seasonality continues to work more often than not. While investors have recently increased equity allocations evidence suggests that investors are still positioned conservatively. The NAAIM survey, Investors Intelligence, AAII and ISI surveys all show equity allocations below average.

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