- The Washington Times - Friday, May 8, 2009

OPINION/ANALYSIS:

Over the last 10 weeks, the stock market as measured by the S&P 500 has moved 35 percent higher.

Admittedly, I had some concerns about the market as we headed into the first-quarter corporate earnings season, but the stock market has held up rather well since reporting began in early April. Earnings mostly have not been as bad as the Wall Street analyst community had predicted. There have been some misses, sure, but that is the case for nearly every corporate-earnings period: Not all companies can hit the ball out of the park, or in this case get a base hit, every time at bat.

At the same time, institutional investors who have been on the sidelines have been creeping back into the market and several economic indicators are suggesting the worst of the current economic contraction is behind us.

Do I think the market will go higher from here? Yes, and any rise from current levels would reflect what an optimist might call “a stabilization in the economic and business environment,” or what the more-skeptical would call “not as bad as expected.”

The questions I find myself asking this week are the following: Is there a “resistance level” ahead for the market and what will it take to get the market above that? At its core, a “resistance level” is the price at which more investors are willing to sell, perhaps to cash in some profits, than are willing to buy. Unless core economic conditions improve, the market is not likely to rise above this “resistance level.” In layman’s terms, this could be compared to “getting over the hump.”

Seeing resistance levels is a more technical approach to understanding the stock market compared to a more fundamental approach that examines industries, companies, products, financial statements and the like. In my mind, both are but arrows in our stock-understanding quiver, and we draw on them as needed.

This week New York-based Epiphany Equity Research published a report stating that the S&P 500, which closed Thursday just above 907, has a major resistance level ahead of it, in the 940 area. In more simple terms, Epiphany is saying the S&P 500 has perhaps another 4 percent or 5 percent to grow before hitting that 940 barrier. At that point, the S&P 500 would be trading at 16 times the consensus expectations for 2009 among Wall Street earnings analysts, compared to the early March level of 11.4 times the consensus.

Needless to say, while the market has corrected after being “so cheap” back in early March, it is far less cheap at the current level and will be less compelling closer to the 940 level. Another way to look at it is if the S&P 500 reaches the 940 level, it will have rallied 40 percent since its March lows amid an economic and business environment that is not as bad as expected but still not good.

As the stock market rises in the near term, does the risk of a modest pullback increase? Yes, it does. In my mind, a pause to refresh would be welcome, as it would allow for more confirming data to make it clear that the economy is indeed stabilizing.

On the positive side of things, expectations for S&P earnings have been ratcheted back further over the last few months, to $58.78 in 2009 and $72.73 in 2010. While some may point to the 24 percentgrowth embedded in those two annual earnings expectations, others would say that any signs of a rebound in the economy could drive upside to those expectations.

What will it take to get beyond that 940 resistance level? My suspicion is it will take signs that not only has the economy bottomed, but that sustainable economic growth is emerging and consumers are opening their collective wallets to spend. The last of those could be the more challenging in the near term given the impact of ongoing jobless claims and their ripple effect on consumer sentiment and credit card related issues.

• Chris Versace is a portfolio manager, equity analyst and founder of Think 20/20 LLC, a research and corporate access firm based in Reston. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in the companies mentioned in his column, although positions may change at any time.

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