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
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.
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.
As always, let me know what you’re thinking: [email protected].