Two Trends to Watch
The weak economic recovery has created a very volatile stock market. Wide swings in investor sentiment give us "it's getting better" rallies and "double-dip recession" sell-offs.
We've enjoyed one of those "it's getting better" rallies that's boosted the S&P 500 85 points, or 8%, from 1,040 on August 31 to a 1,125 close yesterday. The move was supported by improving employment data, better than expected retail sales and spending numbers and as surprise jump in manufacturing activity.
But these days, investors don't maintain their convictions, or stock positions, for long. And economic data is having a hard time building on its momentum.
The most recent manufacturing data didn't improve, but rather, came in as expected. Oil inventories rose, suggesting demand isn't improving as much as we might like. FedEx (NYSE:FDX) missed earnings expectations and will reportedly fire 1,700 employees.
New jobless claims fell by 3,000 last week, when a rise of 9,000 was expected.
Still, it would seem that we are due for a "double-dip recession" sell-off in the works as sentiment makes the predictable swing to the negative.
To makemoney in this market, it's necessary to understand that sentiment, and stock prices, are stuck in a range. Neither can get too high, or too low. Investors, and traders for that matter, have gotten very short-sighted. Nobody wants to hold a position for long.
It's been important to buy the dips and take profits quickly.
But let's not lose sight of the fact that, at some point, a rally will stick, the fear that the market is on the verge of a crash will fade, and the administration vs, Congress vs. Corporate America animosity will also fade. (I've written at length how this is contributing to negative sentiment)
Perhaps the most important thing for investors to watch for are signs that trading range and sentiment range will break. And I don't mean a falling unemployment rate. Because just like during the "jobless recovery" of 2003-2004, the stock market had come a long way before hiring picked up.
I see two trends that I think are very important. One is the slight improvement in unemployment claims. Clearly, this trend is in its infancy. But it could suggest that the lows for unemployment are in.
The other is home foreclosure. We're all aware that banks have been dragging their feet on foreclosures. And with good reason. Delinquent loans are an accounting problem, and banks have been building loan loss reserves to offset them. But foreclosing on a home realizes those losses, and puts the banks one step closer to completely removing those balance sheet drags.
Foreclosures in August were up 25% from a year ago. Banks are still reluctant to flood the housing market with new inventory. But their increasing willingness to foreclose and clear out bad loans is an important signal that banks believe they are healthy enough to move into the next stage of their recovery.
Rising housing inventory, and the resulting pressure on prices, might look like a bad thing. But it's a necessary step toward de-leveraging and balancing the economy.
TradeMaster Daily Stock Alerts' strategist Jason Cimpl is watching the current stock market situation as a consolidation for the next leg up. He has been spot-on with his outlook for the last year, nailing important turns for the euro, the U.S. dollar, bonds and the stock market.
Jason is looking for a break above 1,130 on the S&P 500 to signal a further move to 1,172. If you're ready for short-term profits with TradeMaster Daily Stock Alerts, click HERE.
As always, let me know what you're thinking: dailyprofit@wyattresearch.com.
