The Nvest Market Blog, our current thoughts on the Street

Another Week of Impressive Gains - Week Ended 7/24/09

posted 07.27.2009 at 09:55 a.m. by steve

For a third consecutive week, stocks rallied higher as corporate earnings reports continued overall to top analyst estimates with economic indicators following suit (the Chicago Fed National Activity Index, a composite of 85 different economic indicators, improved in June). Most noteworthy was the action on the Dow, which made its way above 9,000 for the first time since early January (2009). A chunk of the gains came on Thursday as an unexpected jump in home sales helped catapult the major indexes over +2% on the day. The favorable news for housing was particularly well-received by investors given that deteriorating fundamentals for housing are what most blame for financial meltdown (and remain troublesome for the banking sector). All told, the tech-heavy NASDAQ led gains for the week with a surge of +4.21% while the S&P 500 and Dow jumped +4.13% and +3.99%, respectively.

The recent rally certainly feels good for investors, especially seeing the Dow recover to values not seen since the beginning of 2009 (as the holiday rally, which ran from 11/20/08 to1/6/09, was coming to an end). And, for those who have been sitting on the sidelines, the pressure continues to mount as feelings of missing the new bull market continue to escalate. Indeed, a growing majority of economists now believe that the worst of the economic pain is behind us. However, following a third successive week of gains with almost no days of pause, the advance has some feeling it has been too far, too fast; some pullback or pause may be necessary. Worthy of mention is the fact that most bottom-line gains have come from aggressive cost cutting rather than increasing revenues. Additionally, most seasoned Wall Street analysts would suspect that while earnings season has started exceptionally better than expected, it is usually the less favorable earnings that get reported as the season matures. That being said, the current spring rally, now nearly 5 months running, has continued to surprise to the upside. It is not uncommon for investors to fail in their ability to recalibrate expectations after significant market events, opening the door for more surprise in days and weeks ahead.

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Stocks Uneasy Ahead of Corporate Earnings

posted 07.13.2009 at 08:34 a.m. by steve

Equity markets came under pressure in the first full week of the third quarter as investors grew increasingly uneasy about corporate earnings season and the recently weaker economic news. For most of the week, it appeared as though stocks were on the defensive, with volume picking up modestly but still below average. It would seem now that the equity market has no conviction of an economic recovery. The most harmful day of the week for investors came Tuesday as the S&P surrendered -2.0%. All told, the S&P and Dow slid -1.93% and -1.62%, respectively while the tech-heavy NASDAQ fell -2.25% as some industry heavyweights indicated that business spending on technology has been weaker than anticipated. In addition to setbacks in the equity markets, commodities moved down in tandem (oil finished the week below $60 per barrel, down from a recent peak of about $74 just two weeks ago) as worries over the economy continued to sink in and talk of more strict regulation in derivatives markets increased.

It is not unusual for the markets to exhibit some anxiety before earnings season begins each quarter, especially after a prolonged period of weakness. However, fear is increasing that the current recession, which was showing early signs of improvement just weeks ago, might still have a bit longer to run. In fact, some believe that we might see a double-dip recession, wherein the economy could again slip backward after the sugar-high from tax refunds (now past) and various stimulus measures fade. Still, businesses should have some easy year-over-year earnings comparisons, and could just as easily renew the optimism that was gaining momentum in late-May and early June. Nonetheless, as we explained in our current quarterly newsletter, it is our feeling that investors now want to see signs of real improvement, not just a continuation of news that is less-bad than expected in order to send the market on its next leg higher. Not only do investors want to see profits (rather than less severe losses), but they could really use some positive surprises from economic data. In addition to being keenly focused on corporate earnings this week (in particular several key banks and industrial bellwether names), the markets will turn their attention toward economic-related releases due out on retail sales, housing starts and others that could help provide clarity on the mindset and health of the consumer.

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Weak Data Fuels Sell-Off Ahead of Holiday Weekend

posted 07.06.2009 at 11:13 a.m. by steve

In what was another see-saw week for the markets, the S&P, NASDAQ and Dow finished down -2.45%, -2.27% and -1.87%, respectively. Despite beginning the week with a healthy gain on Monday, the markets came under significant pressure as the July 4 holiday-shortened trading week (markets were closed on Friday) wore on. On Tuesday, indications from the Conference Board suggested that the economic recovery is going to be slow after reporting a disappointing drop in consumer confidence. High unemployment and a lack of credit are still hurting consumers. The real carnage for stocks was suffered on Thursday, ahead of the long weekend, after it was announced that June saw significantly more job losses than in May (467,000 compared to 322,000), further hampering expectations for economic growth in the second half of 2009. Perhaps one positive outshoot of the weak economic data being reported is that oil prices have begun a meaningful correction, down today almost $10 from their recent highs above $70 per barrel. Keeping oil prices low should help ease the pain on consumers (although oil prices will continue to find support as investors increasingly fear inflation problems in the coming years, using the commodity as a hedge).

In recent weeks, the markets have traded inside a fairly wide range. However, the recently heightened volatility has come on extremely light trading volume as the summer vacation season appears to be in full swing. With light volume, it is difficult to take much conclusion from daily or weekly price moves. Still, the recent economic readings are surprisingly weaker than expected, again giving investors much uncertainty about the path of recovery. In the near term, that uncertainty could continue to play out in the form of heightened volatility, especially as investors look toward corporate earnings in hope of gaining a flavor for what companies are actually experiencing. In order to support the next move higher for the stock market, we do believe that economic data will have to start turning decidedly good, rather than just continuing the streak of less-bad.

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