- Market Commentary -

July 28, 2010 (FinancialWire) (By Dr. Joe Duarte) (Go to http://www.financialwire.net/?s=cmmtry for all recent commentaries.) — The Dow Jones Industrials Diamond (NYSE: DIA) is well ahead of the rest of the market right now, but barring a nasty reversal in the days ahead, this market has shown lots of improvement.

The S&P 500 had a nice day on Monday, July 26. But the real work is about to start for the bulls, as the index is about to encounter a narrow band of very strong resistance between 1115 and 1131.  There is plenty of resistance above, which means that sellers are lurking. And this is the same price area where the rally failed in June, so it’s an important time for the markets.

The rally was broad on Monday, bringing the NYSE advance decline line (NYAD) to within one or two good days of breaking out to a new high for this rally. And while this is a positive, we'll note that the Nasdaq advance decline line is lagging. As we've said here many times before, the NYSE advance decline line takes into account the action of ETFs, bond funds, and preferred stocks. This distorts the overall picture in the stock market to some degree. Still, it is a positive, but one which needs to be strengthened by better performance from the Nasdaq and the smaller stocks.

The surprise of the week so far has been the breakout for the Dow Jones Industrial average, which is the leading index in this latest rally. Much of that may have to do with the dollar's persistent weakness. Most of the stocks in the Dow are export companies, which are aided by a weak dollar.

Still, the small stocks in the Russell 2000 have also moved higher, although this area of the market is lagging behind the blue chips to some degree. What's a total positive for the markets, though, is that all three indexes, the Dow, the S & P 500, and the Russell 2000 are above their 200-day moving averages. That means that the long-term trend has turned back toward the positive.

So while the news cycle seems to be turning to the worst we've seen in a very long time, the market is starting to climb the proverbial wall of worry. As cynical as it sounds, that's more of a positive environment for investors, as the worse the news seems to get, the more the market is starting to strengthen.

Much of that may be the notion that we addressed here last week. As the news worsens, and the Obama administration digs in its heels, the public is increasingly negative with regard to the direction of the country. As the Republicans learned in the last election, the public will vote the party deemed responsible for the current situation out. And despite the White House's persistent blaming of its troubles on Mr. Bush and the Republicans, things haven't improved much during their tenure. And polls consistently point to increasing voter anger.

So, what's this rally about? No one knows, but it is possible, that aside from the glimmer of good news that has sprouted in the outlooks of companies like FedEx, the market is starting to discount a change in the political balance in Washington, to one of a more friendly stance toward business.

The market rally is gathering steam. The reasons are nebulous, but are likely a combination of changing expectations among traders with regard to the political balance in Washington, as well as the potential for some improvement in the global economy.

A long term bull run is not something that we are expecting at this point. But a modest rally that could last a few more weeks is not out of the question for now. The S & P, though, has to get above 1131 convincingly to confirm the overall bullish tone that seems to be increasing.

Investors should have been building small positions in stocks over the last few days and should be adding to them in the next few days, although caution is still warranted. Visit our individual sections for more ideas.

Just remember, the rally in June ended quickly as the market approached this price area. It could happen again, so investors must continue to think like traders and be ready to switch attitudes and sell non-profitable positions in a hurry. (Go to http://www.financialwire.net/?s=joe+duarte to see more commentaries by Dr. Joe Duarte; and go to http://www.financialwire.net/2010/04/22/about-duarte/ for more about Dr. Duarte.)

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