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Stock Market Approaches 10,000

Posted: Sep 22, 2009 12:40 PM by Eric Fox

Tickers in this Article: SPY, PALM, CROX, SMRT

The rally in the stock market since the March 2009 lows has been both unexpected and powerful, leaving investors scratching their heads and wondering if they should jump on board, or wait for the inevitable correction.

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The S&P 500 continued its meteoric run and busted through the 1000 level in August 2009, making those who had the courage to pick up the S&P 500 SPDRs (NYSE:SPY) in the spring very happy.

On A Roll
If you look at performance through September 15, 2009 for the Nasdaq, this is the fourth-best year since the index was constituted in 1971. If you annualize the 33.25% return for Nasdaq, we are heading for the best year ever.

Many of the constituents that trade on the Nasdaq have posted incredible gains. One of the biggest gainers is Stein Mart (Nasdaq:SMRT), a small retail chain that is up more than 1100% year to date. Earlier in the year, the market read this stock's eulogy and sold it down to $0.99.

Another huge performer is CROCS, Inc. (Nasdaq:CROX), the maker of those ubiquitous rubber shoes. The stock is up about 460% year to date, despite its accountants issuing a "going concern" warning back in March 2009 indicating substantial doubt about it ability to stay in business. In the technology sector, Palm Computer (Nasdaq:PALM) has put forth a gain of 377% during 2009.

Is The Market Overbought?
From a technical perspective, the market appears overbought. The percentage of stocks that are more than two standard deviations above their 200-day moving average is at 52.58%. This is the highest reading since data started being tracked in 1986. The S&P 500 is 20% above its 200-day moving average. This is the highest percentage since 1983.

So the question is, will the rally continue? The short answer to that question is yes. Momentum is a powerful force that can go on for quite some time, and it may be risky to take a short position against it. Make sure you have the staying power as the next correction may be far away. (For more on momentum, take a look at Riding The Momentum Investing Wave.)

As the market approaches and then passes the psychologically powerful barrier of 10,000, it may actually pick up speed and even more momentum. Last, many stocks are still far below what they traded at just one or two years ago, leaving investors hungry to make up the losses that they have suffered over this bear market.

The Bottom Line
Most market commentators are urging caution around this rally, and yet the market continues to inch up higher. Investors should have a healthy respect for momentum as it can carry the market barreling through the 10,000 level.

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By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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