A Solid Rally -- That's on a Fragile Footing

Stock Market Outlook New York Stock Exchange
Stock Market Outlook New York Stock Exchange

As fixated as some investors may be on the technically insignificant Dow 11,000 level -- now a mere 73 points away -- they'd do well to widen their fields of view. There's no shortage of technical indicators flashing warning signs that the market is overbought. Nearly the entire S&P 500 ($INX) is trading above its 50-day moving average, according to the folks at Bespoke Investment Group.

The good news is the latest readings on manufacturing and jobs suggest the recovery is indeed real. The bad news is the recovery is as poky as expected, too. As traders on the floor of the New York Stock Exchange know all too well, any decent piece of economic data as critical to the recovery as payrolls has the potential to spook the market with a case of the interest-rate-hike willies -- especially at a time when stocks are so strenuously overbought.

That's just part of the reason a guy like Jeffrey Kleintop, chief market strategist at LPL Financial, can be quite credibly bearish in the short term and yet remain bullish for the full year. As he recently told clients, the rally faces a gantlet of challenges in April, including earnings seasons, Fed monetary signals, Chinese credit tightening, European credit conditions and, well, you get the picture.

"Given these factors, a 5% to 10% pullback within the second quarter would not be unusual as the stock market tracks a pattern similar to the first quarter," Kleintop writes. "However, we expect a pullback to be followed by a rally to a new high for the year, as conditions remain positive with above-average economic growth, improving credit trends, low interest rates and the return of job growth."

Traders on the floor of the New York Stock Exchange are certainly mindful of a couple of things: Over the last five weeks, stocks have quietly and impressively ground out an 8% gain -- and markets never move in a straight line.