Rain for Roses; the Fed Irrigates Stocks

By Bruce Zaro | September 20, 2007 | 12:21 PM | 7 Comments

This has not been a banner year for roses in the Boston area. The lack of any appreciable rain since June has yielded weak, disease-prone blooms that have not displayed their expected fragrance and vivid color.

Some similarities can be seen in the U.S. stock market. At the bottom of its pull back in mid- August, the Dow stood 20 points below its opening 2007 level. The S & P 500 was down 3.24% and the NASDAQ was up 1.1%. Then the rains arrived. For the gardens, fresh blooms and green lawns. For the US market, a monster rally.

Investors have been pining for a rate reduction since well before the august 2006 Fed's stand pat meeting. At each meeting before and after, participants have been hanging on every nuance in hopes that the time honored primer of lower rates would be delivered, adding accelerant to a steady market advance.

Internal figures I follow suggested that the late summer swoon would be a good buying opportunity. Long Term indicators (the New York Stock Exchange Bullish Percent - BPNYSE) and the short term indicators (the New York Stock Exchange Hi-Lo, and the New York Stock Exchange 10 Week Indicator) had declined to levels not seen since October of 2002 and September of 1998. In each instance, these indicators reached extreme oversold levels. I like to see the short term indicators reach these contrarian levels as well, then reverse to tell me the selling is drying up and some buying momentum is coming in. That is precisely what happened late in August.  

Then the Fed's rate cut hit. While the bounce has been strong and the first move off the bottom is stretching stocks to a more neutral part of their trading bands, further gains are on the way as the markets seasonally favorable period approaches. I expect some backing and filling in the next weeks around the volatile 3^rd quarter earnings season and more fretting about the economy, but the playing field is now greatly tilted in investors' favor.   Don't join the worry warts; go with the improving technical trend and expect a sizable fourth quarter rally from here and further outsized gains in the first of 2008.

Roses Bruce, how far has this bounce taken the market off the oversold area you mention in your post? Does that concern you right now? I mean you might be buying here up on a string only to have the market retrace some of it's move around earnings time (always a scarying time - this reporting season could be ultra scary). how do you deal with that? Submitted by goldie on Fri, 2007/09/21 - 12:00pm » reply |

How About The Transports Bruce: while I would agree with the assessment, I wonder what your thoughts on the transports might be.  I think the current rally was somewhat inevitable as stocks were deeply oversold (as you mention) and sentiment was very bearish (i.e., bull signal); in my opinion these factors limited the downside since mid- August.  But what concerns me is that each and every rally from Feb 2007 onward has been narrower and narrower and started without more than a pullback - this market really hasn't corrected.  So back to the my original question: what would you think of a rally in stocks without the involvement of the transports?  Or any recent leaders like energy?   Submitted by Guy Lerner on Thu, 2007/09/20 - 2:32pm » reply |

no way you are both wrong... gold is roaring...us dollar is collapsing... us stocks will follow as the consumer driven economy falls off a cliff...only precious metals and non us cash makes sense now Submitted by jsjgold on Thu, 2007/09/20 - 12:57pm » reply |

V Bottom? I'm somewhat bullish on U.S. stocks like Bruce.  However, so far the  market has roared off those August lows; V bottoms are rare so I wonder if you think this can be a sustainable advance. If we pull back-- you called it backing and filling-- do you have thoughts as to how far? Submitted by Chip Hanlon on Thu, 2007/09/20 - 12:46pm » reply |