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There Is Good Reason For The Pause

Is the rally over for the year? Not likely, but there is good reason for a pause.

The World Bank taking down global growth rates goes to the core argument of the bears: that the economic recovery (and earnings recovery) will not live up to expectations.

This questioning has been going on for a couple weeks; for example, despite aggressive buying by China there are indications that inventories of important metals like copper are quite high; demand is still very much a question mark.

There are two other issues:

1) The strong dollar, which is related to the weakness in the Euro, as European economies are even weaker than ours;

2) Profit-taking ahead of end of Q2. while the S&P 500 is up 15 percent since April 1 (through Friday), several sectors have outperformed:

  • Banks +32%
  • Techs +19%
  • Materials +17%
  • Energy +12%

With gains like these, traders are not going to wait until stocks drift lower into the end of the quarter; they are going to lock in profits as soon as possible.

Why? Because stocks can move so fast that before you catch your breath your gains have evaporated. Just look at what's happened the big commodity names in the last 7 or 8 trading sessions:

  • Massey down 34 percent
  • Freeport-McMoran down 26 percent
  • US Steel down 20 percent
  • Alcoa down 18 percent
  • Hess down 18 percent

Whew! Those are big drops!

As a result, even positive news is being sold in leaders today:

a) Marvell Technology raised its second quarter revenue guidance and is down 4 percent;

b) Apple down 2 percent despite crowing that 1 million iPhone 3GS's were sold over the weekend.

c) Oil is down nearly 4 percent but airlines are down 3 to 7 percent

d) The Emerging Market Index (EEM) is down another 3 percent, even though the Shanghai Composite Index closed up another 0.6 percent to its highest level since July as Premier Wen Jiabao said China would stick to its stimulus package.

So when will traders start "buying the dips?" Not clear, but there's a lot of chatter around the end of the quarter and the Fed announcement Wednesday.

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