Recent Rally High on Hope, Short on Substance

Do you remember the era of dont fight the Fed? QE2 ended less than three months
ago. Since then the credibility of Bernanke and his inkjets seems to have fallen
further than even stocks. A front page headline in last weekends Wall Street
Journal sums up the situation: World-wide distress rises as investors see
futility of governments, central banks A Monday WSJ lead article screamed: Pivot
point: Investors lose faith in stocks while CNBC ran a piece called Have bulls
lost all hope? Wall Streets sentiment is the polar opposite of what it was five
months ago when the S&P traded around and above 1,350. Wall Street Journal:
World revs up profits April 21 Bloomberg: Stocks, commodities rise as earnings
top estimates April 21 Wall Street Journal: World is bitten by gold bug April
23 MarketWatch: The threat of deflation will remain a back-burner issue April
26 Wall Street Journal: Silver rush spreads to stock market April 27 Breakout:
The S&P 500 breaks out April 28 AP: Sales growth the big surprise on Wall
Street May 1 AP: Buffet says odds of another U.S. banking crisis low May 1
MarketWatch: Equities finally seeing light on the economy May 12 Deductive
Reasoning Stocks Must Rally Lets see. Excessive optimism at the April/May highs
led to an ugly decline. Purely based on sentiment, the current pessimism should
spur a spirited rally, right? After Thursdays close above key S&P resistance at
1,121 it was clear that the immediate bearish threat was over. After
recommending to go short at 1,191 on the day Bernanke delivered his Operation
Twist speech, Thursdays ETF Profit Strategy update stated that: Chances are
stocks will digest this massive two-day drop and chop around with an up side
bias and target of around 1,148. Resistance is now at 1,148 and 1,173.
Short-term traders may wish to close out their short position(s) and re-enter at
higher prices. The chart below show that sentiment readings measured by the
Institutional Investor and American Association for Individual Investors had
also soured enough to spur at least a small counter trend rally.