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Brace Yourself: This Rally Might Screech to a Halt

On Friday, the S&P 500 closed at its highest level since December 2007. So … are we set for a crash?

Maybe. Here’s what we’re fighting against:

  • Corporate Earnings Still Suck: FactSet reports that “for Q4 2012, 78 companies have issued negative EPS guidance and 32 companies have issued positive EPS guidance.” Other fun facts: The growth rate is a meager 2.4% for earnings, and the earnings growth rate has been cut by about 75% since Sept. 30.
  • The Job Market Still Sucks: Employers did add 155,000 jobs in December, but that’s just enough to tread water, and the unemployment rate remains a stubbornly high 7.8%.
  • Stocks at a Ceiling: Bespoke reports that nearly 9 in 10 stocks making up the S&P 500 are currently above their 50-day averages. “At this level, we usually see the market at least take a breather before making another big move higher,” Bespoke writes. Furthermore, Steven Place of Investing with Options says that the recent rally was too quick to be sustainable. “The monster gap up experienced on Wednesday has left the market structurally unbalanced,” place said. And Dynamic Hedge points out that money has been dumped into “risk-on” assets at an unsustainable pace that only can be “resolved by time or a pullback.”
  • Debt Ceiling and Europe: Oh yeah, and we still have to deal with the U.S. debt ceiling and the second round of budget fights that come after the fiscal cliff. Then there’s the continued risk of systemic debt problems in Europe. Joy.

Granted, there are counterarguments to all of these points. Wall Street climbs a “wall of worry” to new highs regularly. And momentum for stocks doesn’t necessarily have to stop — or if it does, that delay might just be short-lived. There’s also the great point made by David Weidner in the Wall Street Journal last week about the “uncertainty con,” where investors should see uncertainty as a buying opportunity and not a signal of collapse.

But at the very least, investors should be reading the posts like the ones I’ve linked to. The Q4 earnings we are about to see could be very ugly, and macro concerns remain very troublesome even if the tape continues to move higher.

Maybe uncertainty is a buying opportunity … but the skeptic in me says that buying opportunity came two months ago in mid-November. The S&P has added about 8% since then, and if you’ve missed it, you might not want to jump in this late in the game.

My advice: If you’re a short-term trader, take some partial profits and protect yourself with stops. It could get ugly in the next few months.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

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