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Stocks rose briskly last week, resulting in a big week for the major market indexes. Weekly and monthly index charts improved, and such major U.S. stocks as The Boeing Co. (NYSE: BA), Hewlett Packard Co. (NYSE: HPQ), American Express Co. (NYSE: AXP), Google Inc. (NASDAQ: GOOG), Apple Inc. (AAPL), Goldman Sachs Group Inc. (NYSE: GS) and General Electric Co. (NYSE: GE) emerged from flat-lining or faltering price patterns on decent, if not outstanding, volume.
Just two weeks ago, every one of the afore-mentioned stocks looked terrible, exhibiting intense apathy amid slow, grinding declines. Then the skies parted, and suddenly the sun is shining on these shares once again.
That's why U.S. stocks are off to a strong March start – already up 4.1% from the end of February. And don't forget, a year ago at about this time (March 9, 2009), the market reached its nadir: The Standard & Poor's 500 Index is up 69.98% since that time.
Here's why the shift seems so abrupt. The markets are now in a tug of war between two forces:
- On the plus side are good fourth-quarter earnings reports related to an improving economy.
- On the negative side – as a friend at a major macro hedge fund described it last week – are "frigid winds blowing across the credit icebergs."
The Stock Market Tug of War
Another way to explain this is to say that this tug of war is between the market bulls who are cheered by a nascent economic recovery driven by the inventory cycle, quantitative easing and fiscal stimulus and the bears who can only see the negative impacts of structural credit risks.
Both teams have their strengths and weaknesses, which is why neither side has been able to get firm traction for longer than three to five weeks at a time so far this year.
The bears have been lucky: It seems a new iceberg drifts into view every few weeks – often enough to nurture the bears' view. At first it was just Dubai; and then was Greece, and then Spain. Pretty soon there could problems from China, the United Kingdom, and even the U.S. states of Illinois and California.
The bulls have been lucky in that the companies that slashed their work forces last year are showing great earnings advances. They've also been helped by the fact that the credit markets have improved enough cash to renew the buyout- and share-buyback games.
The jumpiness that we are witnessing in the markets is a matter of investors wanting to focus on the positive stuff one month and the negative stuff the next month. Don't even try to find a cycle in that.
The best we can do from our perspective as individual investors is to focus on the fact that as long as the major indexes remain above their 10-month averages, we are in a bull cycle. That means we must remain committed to stocks. And as long as we're into stocks, let's stay invested in the ones that are both the cheapest and the most successful, and avoid the ones that are expensive and struggling.
I have been telling readers of my Strategic Advantage newsletter to focus on exchange-traded funds (ETF) that invest in retail, aerospace/defense, regional banks, technology, insurance, dividend-paying energy companies and corporate bonds.
Today we'll go over some details to help you understand the changes under way in world markets now, but here first is a quick list of key reasons for the strong start to March:
- A renewed belief that Congress and the White House are at odds, creating legislative gridlock.
- A modest slip in the U.S. dollar.
- New evidence that Japan's recovery is gaining traction.
- New evidence that emerging markets are growing enough to allow central banks to tighten credit.
- A temporary end to angst over Greek debts.
No wonder markets responded. Check out the performance of key indexes in March – listed here in an ascending order:
- The Dow Jones Industrial Average rose 2.9%.
- The Standard & Poor's 500 Index was up 4.1%,
- The FTSE World Ex-USA Index rose 5.7%.
- The Nasdaq 100 rose 5.8%.
- The Midcap 400 rose 6.2%,
- The iShares Emerging Markets big-caps rose 6.3%.
- The SmallCap 600 rose 7.3%.
- The Russell Microcap rose 7.9%.
- And the Dow Jones Greece Index ($GRDOW) rose 10.8%.
Now what do you see in that pattern? If you said increasing levels of risk, you win. Risk-taking was back on the table, which is just about all you ever need to know about markets.
A Return To Risk-Taking
When people with money decide to put it at risk and demand for volatile assets rise, stock markets advance. That's about as simple as I can make it. If people want to buy bedraggled Greek stocks three times more than they want to buy Merck & Co. Inc. (NYSE: MRK) and International Business Machine Corp. (NYSE: IBM), then the animal spirits are stirring.
Risk-taking has returned to vogue because investors are increasingly confident that a global economic recovery is on track, and will persist despite occasional hesitations. Leveraging work by ISI Group and my own analysts point to these positives in the U.S. and world economies today:
- Energy exploration. The oil and gas rig count is up 89% annualized in the past nine months, a sign of increased oil and gas discovery and extraction.
- Heavy industry. Steel production was up again last week, and is now up 82% annualized in the past 10 months.
- Households funded. Tax refunds have surpassed $105 billion so far this year, which is +9.9% over last year. This is a major factor boosting retailers' improved results.
- Buyers engaged. Rasmussen and University of Michigan studies of consumer confidence are tracking higher, though a survey by the Conference Board has turned south.
- Income up. Corporate profits in the fourth quarter will probably print a +32% year-over-year increase when they're all done counting, and a regression model suggests the 2010 second quarter so far is on track to record a 37% increase in profits, which would yield a record $1.68 trillion.
- Foreign strength. Overseas, German employment has improved for three straight months; Korea's business expectations are higher; Malaysian real GDP is up 13.7% annualized; Japanese small-business sentiment is soaring; Hong Kong real GDP is up 14.5% annualized; Japanese retail sales and exports are up big in the past 10 months.
- Emerging backup. Even if both Eurozone and Japanese GDP growth clock in at 0%, 2010, global growth can still be as strong as +3.8% after you add the 7% growth in emerging markets to 4% growth in the United States.
- Stocks improving. All major U.S. equity and bond indexes have moved back above their 50-day averages as demand for equities and debt has improved.
- Goods demand. Durable goods orders are up 13.7% annualized over the past 10 months.
- Goods movement. Measures of U.S. trucking shipments recorded the largest increase in almost two years, with tonnage up 15% annualized over the past nine months alone.
Of course there are negatives, as well, and some are quite significant. ISI analysts point to the recent 22.2% plunge in existing home sales, as one example. And that's not all. New home sales fell to a record low last week, mortgage applications dropped to a new low, unemployment claims continue their resolute increases, there is still a persistent lack of hiring, and demand is faltering in Germany and France.
Add up all the pluses and subtract the minuses and you still have an environment where it makes sense to remain long stocks and bonds. The larger companies may have a rough time as the indexes approach their January highs. But smaller companies and ones in energetic niches such as machinery, aircraft and retail should be able to maintain their upward trajectory.
Stay positive for now, but don't get complacent.
The Week in Review
Monday: Stocks edged higher as the credit bears continued to cover their short bets against Greece and the rest of Europe. Over the prior weekend French President Nicolas Sarkozy vowed that the Eurozone countries will come to the rescue of Greece should help be needed, noting that the country is "under attack" from speculators.
Ben May, a European economist at Capital Economics Ltd. in London, said Sarkozy's comments were the "strongest pledge of implicit support yet." measures "were appropriately met with an avalanche of support words from the rest of Europe."
Tuesday: Stocks tried their little hearts out on Wall Street on Tuesday, a day that marked the one-year anniversary of the closing low of the 2007-2009 bear market. Shares overcame a trip at the start of the session to trade as much as half a percentage point higher by midday. But then the fear of heights set in, and everything unraveled for the big-cap indexes in the final hour and a half. Still, no harm no foul – it was a draw, not a loss.
Wednesday: Stocks drifted higher like dandelion petals on a light breeze, impelled by no major economic or earnings news, global financial calamity or analyst puff machine. It was a mild day amid a mild week, which is enough to really make alert investors begin to worry about complacency.
Thursday: Initial weekly jobless claims remain troublingly high, coming in at 462,000 for the week. This was slightly ahead of analyst expectations. The four-week average climbed by 5,000 to 475,000 – the highest level since claims first fell below 500,000 back in November.
Friday: The consumer was at the center of Wall Street's attention with the release of new data on retail sales and confidence. Sales in February surprised to the upside, expanding 0.3% when analysts were expecting a 0.2% decline despite poor weather and the troubles for Toyota Motor Co. (NYSE ADR: TM). But the University of Michigan's Consumer Sentiment index slipped to 72.5, compared to the prior reading of 73.6 and the consensus estimate of 74. Expectations dropped to the lowest levels since November.
The Week Ahead
Monday: Industrial production for February and the Empire State Manufacturing Survey for March will be reported. Analysts expect production to be unchanged while the Empire State Survey is expected to decline slightly, but still suggest modestly positive growth in business activity for manufacturers in the state of New York.
Tuesday: The U.S. Federal Reserve will end its one-day policy meeting. Although interest rates are expected to remain unchanged, investors will be watching for an update on the planned exit from the Fed's direct-bond-purchase program. Also, another 0.25% increase in the discount rate charged to banks is possible since the central bank is trying to normalize the relationship between the discount rate and its target Federal Funds rate. This is being done in anticipation of the central bank paying interest on reserves banks store in its vaults as a way to mop of excess cash in the system.
Wednesday: An update on inflation courtesy of the Producer Price Index (PPI). Last month, the PPI made a surprise move to the update, gaining 1.4% in January after adding 0.4% in December.
Thursday: Another update on inflation, this time from the Consumer Price Index (CPI).
Friday: A quadruple-witching-options-expiration session. Expect volatility to wane as brokerages try to ensure the maximum number of March option contracts expire with no value.
** Researcher Anthony Mirhaydari contributed to this report.
[Editor's Note: As this currency-market analysis demonstrates, Money Morning Contributing Writer Jon D. Markman has a unique view of both the world economy and the global financial markets. With uncertainty the watchword and volatility the norm in today's markets, low-risk/high-profit investments will be tougher than ever to find.
It will take a seasoned guide to uncover those opportunities.
Markman is that guide.
In the face of what's been the toughest market for investors since the Great Depression, it's time to sweep away the uncertainty and eradicate the worry. That's why investors subscribe to Markman's Strategic Advantage newsletter every week: He can see opportunity when other investors are blinded by worry.
News and Related Story Links:
- Bloomberg News:
Sarkozy Says Euro Zone Ready to Help Greece If Needed.
- Capital Economics Ltd:
Official Web Site.