"The U.S. markets are going through a transition from being liquidity driven to a rally based on fundamental data and that's a very bumpy ride," Andres Garcia-Amaya, global market strategist at JP Morgan Funds, where he helps oversee about $400 billion, said via phone. "Investors are trying to figure out whether we are now pricing in earnings and the jobs situation or whether it's still the Fed leading markets. So we're slowly taking off the training wheels and that makes things a little wobbly."

The Fed stimulus and better-than-expected earnings have have propelled the bull market in U.S. equities into a fifth year and driven the S&P 500 up 137 percent from a 12-year low in 2009. The benchmark gauge has dropped 4.1 percent since closing at a record high on May 21, the day before Fed Chairman Ben S. Bernanke suggested the central bank could curtail its $85 billion in monthly bond buying if the job market improves in a "real and sustainable way."

A Labor Department report tomorrow is expected to indicate employers added 163,000 to non-farm payrolls last month, almost equal to the gain in April. The agency issued data today that showed jobless claims decreased by 11,000 to 346,000 in the week ended June 1. The median forecast of 47 economists surveyed by Bloomberg called for a drop to 345,000. Data yesterday showed companies in the U.S. hired fewer workers than projected in May.

"It's wait-and-see before the jobs report tomorrow," Frank Ingarra, head trader at Greenwich, Connecticut-based NorthCoast Asset Management LLC, said in a telephone interview. His firm oversees $1.6 billion. "It all depends on how traders will read that data and its effect on the Fed's decision making. We need to be assured that the Fed will not taper off monetary stimulus or we need to see significant improvement in the economy to get the next leg up in the rally."

David Fuller's view A strengthening market can move higher on seemingly good or even bad news, as investors conclude that their earlier caution or pessimism was not justified. We mostly saw this from mid-November 2012, as soft economic data and a slow rate of growth in corporate profits was seen as justification for even more quantitative easing by the Fed.

Conversely, a weakening market can fall on seemingly bad or even good news if the latter is not seen as sufficient to justify earlier optimism. This is what we have mostly been seeing since the S&P 500 Index's recent peak at 1687.18 on 22nd May. Chart readers among you will also recognise the large key day reversal on that day, shown on the first of these two charts (daily & weekly).

Hedge fund manager David Tepper probably sparked the mid-May push to that high on the 22nd.


Nouriel Roubini told CNBC on 3rd June that the Wall Street rally will continue for two more years: . 'Dr Boom'? Roubini Sees Two Years of Stock Gains.


There is conjecture in any forecast but caution warnings begin to switch on in my mind when people confidently extrapolate what have already been powerful trends. However, there is no conjecture in pointing out that the S&P's PER valuation has risen considerably over the last six months and is no longer cheap.


Additionally, there is no conjecture in saying that the S&P weekly chart shown above became somewhat more overextended relative to its 200-day MA than we have seen for some time. It did not reach bubble proportions but these overextensions are eventually followed by mean reversion back to and often somewhat below their MAs.

There is no conjecture in pointing out that the S&P has recently seen a bigger pullback than occurred during its December, February and April reactions. This has undermined confidence somewhat as we can see from the daily chart of the CBOE Volatility Index. It is still in the region of its February and April highs but further gains would be another sign of waning confidence.

Today, the S&P touched the upper side of its previous range at 1600, where we could see some steadying. However, a move much below this level in coming weeks would not help investor confidence. My conjecture is that I think we will see a somewhat bigger pullback unless Mr Bernanke decides that he wants to keep the US stock market very firm. He could do this by saying that there will be no reduction in QE over the next few months.