August of 2012 has a clear theme for investors. Many of us are using the phrase "hated rally" because we're watching a market move that makes little sense in the context of major headwinds still in place. I discussed these headwinds a few weeks ago, and the S&P 500 has since tacked on another 4%. To the surprise of many, the S&P 500 is back at levels seen in the summer of 2008 -- before the global economy tumbled into recession. The absolute lows for the market, seen back in April 2009, seem like a distant memory.
It's hard to explain away the recent rally except to note that the European crisis has moved to the backburner (for now), talk of a "fiscal cliff" has cooled down from a few months ago (though it still looms) and earnings season wasn't quite as bad as some had feared. Another factor: short sellers who had been betting on a market tumble have been forced to cut losses in a rising market, giving heavily-shorted stocks an especially big lift.
Yet even if you feel that this rally is warranted and anticipate further gains for the long haul, then you still need to heed the technical signals this market is generating. By several measures, we're moving into what market technicians call "overbought" territory, noting that we're hitting key resistance levels.
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