You Call This a Rally?
By Jerry Slusiewicz | August 14, 2008 | 6:36 PM | 0 Comments
The market continues its upward trend despite the ongoing proliferation of horrible news. If the market is moving from bear-market rally into a full-fledged bull market, we should see a noticeable change in buying volume and price momentum accelerating to the upside. Instead what we are witnessing is rising prices on ever weakening volume. The market could continue up in this fashion, but I doubt it.
Bad news from the usual list of suspects - the financial stocks, have revealed more multibillion dollar problems, with the settlements in Auction Rate Securities market. The end result is that the S&P 500 and the Dow Industrials are up around 7.5% from its July 15 low. The NASDAQ has performed even better, but purchasing in the face of bad news, reflects the buy-the-dip mentality that many investors mistakenly use as their investment strategy.
Government data and company commentary are painting a picture of a global economy in decline. The ranks of the jobless swelled to its highest in more than six years, yet inflation is still clawing at consumers' pocketbooks. It is a recession and it is going global. The big question is has the market already discounted all the bad news. I don't think so.
I believe we are in Act II of a 3-Act play and the momentum and volume on the market seem to confirm my position. The Dow and the NASDAQ today closed at nearly the same levels as they did on July 23rd, a week after the rally started. Trading volume is sinking as the market has gone on a two day up, followed by two day down dance.
According to Thomson Reuters, second quarter earnings per share are on track to decline 22% from the year-ago period. Excluding the financial sector, they are projected to be up 4.7%. It's not an ideal earnings environment by any means. Many investors are looking at this as the cup is half full. It would take a lot more conviction on the part of institutional investors to convince me that it actually is not half empty.
New problems continue to be revealed in the housing sector. According to Zillow.com fully one third of all mortgages are owed more than the actual value of the house. In other words they're under water. Some are downing as foreclosures (including short sales) continue to soar.
A record number of banks have tightened standards for all types of loans; from subprime to prime, commercial real estate loans, and business loans, according to the Fed's survey of senior loan officers this week. For example 74% of banks have tightened standards for prime mortgages. The reluctance of banks to lend defies the Fed's effort to pump billions of dollars into the financial system to encourage lenders to keep extending credit. Access to capital is what the global economies need to slog through a deflating economy.
Anxiety about the risk of recession across Europe, the UK, and Japan weighed heavily on their currencies against the dollar in the past couple of weeks, as interest rate differentials may adjusted in the dollar's favor. Only time will tell if this is a change in the long term direction for the US dollar. Falling commodity prices including oil could also help strapped consumers, but is this a shift from the last few years or a pause that will resume soon enough? The media seems to have very short memories in their reports about market tendencies.
The level of assets in money market funds has actually increased 1.8% since July 16 to $3.56 trillion. While this indicates there is still a lot of buying power on the sidelines, which can be read as a bullish development. The increase in money market fund assets in the midst of this rally suggests investors, overall, are still in a capital preservation mode. It's not the winning trades that separates the professionals from the amateurs. Patience is sometimes the safest course of action. There will be plenty of opportunity to make money on the upside if the actual low turns out to be the levels from July 15th. But a safety net needs to be in place in case it isn't.
For a free portfolio evaluation or more information contact Jerry toll free at (800) 449-9501 or jerry@pfpinvest.com
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