Stocks Pause After Biggest 3-day Run Since March

This post is a little late as I have not been able to tear myself away from the Hank Paulson testimony on CNBC. I don't want to get off on a rant, but I find it amusing that these Congressman try to play Monday-morning quarterback and criticize each and every move Paulson and Bernanke made in trying to save the financial system as we know it.

In a calm environment, maybe more a more thoughtful approach could have been taken, but if you were watching the financial meltdown minute by minute during that period, as I was, you know that time was of the essence. I don't think these Congressman who don't follow the markets closely will ever truly get that.

Now back to the markets: The stock market has been on quite a tear over the last 3 days, with its biggest rally since mid-March. Some have suggested that maybe there was a big short-squeeze going on, as this is options expiration week.

I think that is part of it, but also let's not overlook that there was also a big asset allocation out of bonds and into stocks. To wit, the yield on the 10-year note surged from 3.30% to 3.60% in 3 days. That is quite a bond selloff (where prices drop, and yields rise), and that money could have fueled additional stock purchases.

Given the big rally, it is likely that stocks will pause now. This morning, we got good news in the form of much better than expected earnings from banking giant JPMorgan Chase (JPM), and also better than expected numbers in the weekly jobless claims. Both of these datapoints should have bolstered stock prices, but the market is having difficulty making further headway on top of the last 3 days gains.

Asian markets rose overnight; the 10-year yield is lower to 3.52%; and the VIX is down slightly near the 25.50 level.

Trading comment: Volume rose yesterday on the NYSE, making for the 2nd accumulation day this week. Moreover, market breadth was terrific as both of these accumulation days were 90% up days (where more than 90% of the volume is upside volume). The S&P is in good shape now, as it is sitting nicely above its 50-day average. And the 200-day should soon begin to flatten out, which will provide more support on the next test.

I wouldn't get too aggressive right here, but I do get the sense that many investors remain underinvested in this market. The stair-step higher pattern, with the market bending but not breaking, is starting to look more like 2003. If the market consolidates here for a little, I would expect it to make a run at new highs for the year in short order. The NDX is already attempting this. Could be shaping up to be the summer of frustration for the bears.