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Will the Third Quarter Be Better for Stocks?

A minority of traders are arguing that it will be. The S&P 500is still down fractionally for the quarter, and bonds have dramatically outperformed stocks again. It wasn't supposed to happen this way: Greece and the "soft patch" hijacked the rally.

The majority of stock traders remain fairly downbeat on the economic outlook, but a minority have begun to push for the bull case in Q3.

Here — in a nutshell — is the argument:

1. The economy is indeed in a "soft patch," not a "double dip," which has already been priced into stocks; the factors that created the slowdown in Q2 are largely transitory (this is an argument Bernanke has also made).

2. The factors that contributed to the slowdown are already moderating or reversing: commodity costs have come down, supply chain disruption from the Japanese quake will be less noticeable in Q3, weather will (hopefully) be less disruptive.

3. With a presidential election 17 months away, any sign that the economy is weaker than a "soft patch" will be met with more intervention. With inflation higher, there is certainly a high hurdle for any QE3 from the Fed, but there are other forms of intervention, whether it be further payroll tax cuts, crude oil releases, EU bailouts.

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