Market Rallies For The Heck Of It

Market pundits have their work cut out for them today: how to explain the rally overseas and the positive tone in U.S. futures this morning.

Some are saying the European rally is due to a prediction of an uptick in fourth-quarter semiconductor sales by Koninklijke Philips , but even the company’s own CFO says the improvement is seasonal only, and not an indication of structural improvement. And British Telecom is ending an unprofitable venture with AT&T .

The Nikkei was up largely on an NEC deal with Microsoft and drug company gains on bioterrorism concerns.

And in the U.S., Novellus warned, Caterpillar missed, and United Technologies warned. And analysts continue to frantically lower estimates on IBM before the company reports earnings tonight. Oh, and industrial production and capacity utilization showed that manufacturing remains in its worst slump in decades.

As we said last night, this market looks like it wants to correct, perhaps after one more leg up. That leg up may have started today, although the Dow may have a tough time reaching the 9605 target. 9440 is first resistance on the Dow, and about 1730 on the Nasdaq.

The problem is, investors are pricing in a “V” recovery for the economy – while we’re still working on the left half of the V. There have been no signs that the economy has found its bottom yet.

The best-case scenario is a correction to about 1030 on the S&P. The worst-case scenario? We’ll turn once again to our anonymous market historian, who called the Dow down sharply in September and then called for a rally of at least 10% on September 21.

The historian thinks the Dow has a 62% chance of declining 40% before it can rally 30%. That’s not as high as the 93% probability of the September 21 rally, but those are still pretty good odds, and interestingly, 62% is also an important Fibonacci number. That probability is based on 21 events over 140 years, and would carry the Dow to about 7000. Based on our own chart observations, if the current rally was a bear market correction, the next move could extend to about 7400 (a duplication of the recent 2060-point move from the 9440 secondary peak).

And, of course, in between those two scenarios is a host of other possibilities, from a 50% retracement to a full retest of the lows. We’ll watch the charts and indicators for clues.

And finally, thanks to alert reader Rob Mitchell for this week’s Company of the Week, Cable & Wireless .

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