This past week has given a boost to my thinking that a rally is on the way. True, the market rallied in the last week quite nicely, but the reality is the market lost quite a bit of ground in August and September. Since most of that loss is attributed to out-and-out fear, it is understandable that it would come roaring back as soon as some of the fear dissipates. No, when I say “rally,” I am talking stocks breaking out to the upside of their current range. I am talking stocks moving to the upside of 12,000 on the DIJA and closing in on 1300 for the S&P 500.

I’ve said it before, but it is worth saying again – sitting on the sidelines are trillions of dollars not making any return on investment. The name of the game, folks, is making money, and the only reason money is not making more money now is because of the fear and uncertainty. As we are now seeing, some of that fear and uncertainty is dissipating and money is beginning to flow back into the market. Again, I like this beginning to a rally, but I want more, oh so much more …

Now, one thing in my favor (referring to my rally prediction), and I have said this before as well, the tone of the breathless media is changing. Doom and gloom is fading and optimism is filling the void …

  • European Commission President Jose-Manuel Barroso presented a plan to strengthen European banks and lower Greece’s debt. It’s being seen as the strongest effort yet to address the region’s debt crisis.
  • Parties in the outgoing Slovak government have reached an agreement with a leftist opposition leader on ratifying a plan to strengthen the euro zone’s EFSF rescue fund.
  • The stock market is riding a wave of renewed optimism and investors looking for a reason other than Europe to keep buying may find it in earnings.
  • Stocks have rallied sharply, putting bullish investors back in the driver’s seat as shorts scramble to cover big bets.
  • The third quarter is still on track to be the second-highest earnings period, in dollar terms, on record after the second quarter.

I know I risk sounding repetitive, but, and here I go, “as I have said before,” the one thing the market cares about more than anything else is earnings – are companies making money? Thus, the last bit ‘o optimism in the above list is the most important. If earnings do approach the record recently set, and the European ball of string doesn’t unravel, the rally I see just might happen. And I don’t think I am alone in my thinking. Today the VIX could drop below 30 for the first time in a long time. Now, what does that tell you?

Oh, and it doesn’t hurt that the almost record shorts are scrambling to cover as well. Frankly, I can’t think of a better way to kick off another opportunity to make some money.

Go away you pessimists! Shoo! Get out of here!

Trade in the day – Invest in your life …

Trader Ed