Last Big Bounce Coming

Market Action:
On Tuesday, major bad news swirled around Wall Street and the sellers managed to do very little in the way of damage to the major averages. True, some stocks were hurt, namely the home builders, but for the most part the damage was, well, contained.

Today, Wednesday, as in the Wednesday Update, the market sort of shrugged off Tuesday’s news related sell off and tried to mount a rally, which it did. We normally call this type of activity, “whistling past the graveyard”, you just distract yourself from looking at the headstones by whistling, much like the buyers are doing in the market. They can see the bad news should affect their stock positions but they keep on buying anyway.

In recent years, the bulls have managed to move the market up enough by their whistling, that others notice the pleasant sound of prices moving up and buy stocks just because stocks are now going up and who’s to argue with that?!? Ok, enough with the metaphor…

In after hours’ news this evening, MOT (Motorola) gave the market a bit of news that it has been waiting for a long time—it expects its mobile device business to post a loss for 2007. This news was preceded by a rumor that the Chief Executive would resign and the buyers flocked in to push MOT up 3% during the day before closing up about 2%. You all know that the market did and will disregard this news because it is specific to MOT. They said that cell phone sales in Europe and Asia were weak—that business wouldn’t affect other companies, would it? (oh, the sarcasm is thick)

Technical Indicators:
Since we spent some time on the news in yesterday’s post (see that below if you haven’t already), we will spend more time in this post on the technical indicators. The first is our main momentum indicator which barely dipped at all after yesterday’s action and then jumped on Wednesday’s action. This is typical in a thinly traded market that is nearing a turning point.

Our position is that the market, as measured by the Dow, will try to push strongly to new highs but then someone will turn out the lights and the buyers will be expended. When will this be? Well, that is for another day but the technicals indicate the date isn’t far off anymore. Does this sound familiar to anyone?

The tight trading action of the past month or so has given the market time to rest, getting ready for a small surge to end this pattern. With the news being so utterly pessimistic and the market rallying, the bulls have again decided “to boldly go where no one has ever gone”. Are you familiar with Star Trek? There’s a book, a satire, called the “Hitch Hiker’s Guide to the Universe”, the first in a four part trilogy (we can’t make this stuff up), which says, “to boldly split infinitives”. Do any of you remember your high school English teacher telling you that “to be” is an infinitive and really should be considered one word—and of course never to put something in between, such as “to always be”. That would be splitting infinitives…but of course we digress. Back to the bulls…who have decided to buy on this last leg of the rally.

They really don’t think this is the end of the rally because people don’t believe stock prices or real estate prices can actually go down. Maybe the bond market can go down but surely not the stock market.

Answers:
Erick left us all a few comments in a prior post which we thought deserves a response here. First, he mentioned that it’s funny how $70 oil equates to higher stock prices. Well, this is a popular misconception in the current environment. For years, the hint of oil increasing was enough to send stock prices down, except, that only lasted a day or so. The world has seen massive excess liquidity and the extra money has been fueling increasing prices in commodities, bonds, and stocks alike. Where did the excess liquidity come from? Well, the simple answer is Credit, starting with the US Budget Deficits being financed by foreigners.

Next, he asked if underlying fundamentals have stabilized over the past few years when the stock market has been moving sideways and mentioned PE as a place to start. To us, the credit has been destabilizing and will continue to be that way. The market doesn’t really see it the way we do, at least, at the moment it doesn’t. Our position is that companies have improved their balance sheets by virtue of strong credit expansion in both the public sector and the private sector. As this debt needs to be paid down, expansion does not happen.

Erick’s last comment has to do with how the markets trade against each other. Our only real comment here is that the price of investment vehicles have gone up over the past 25 years and now the baby boomers want to retire and pull their “money” out.

Other than that, bonds really should move up with stocks because lower interest rates should drive stocks up. As rates get pushed up with a deteriorating bond market, stocks should be feeling some pressure. The bond market has not moved much one way or the other for a few years so what gives? Well, if the economy falters, it is most likely that the US Treasury market will be considered a flight to safety or “quality”. The corporate bond market will probably suffer greatly. Plus, the mortgage market is in the process of readjusting to correct prices—that has a long ways to go in our opinion.

One Last Item:
We saw a Wall Street blog this week that mentioned something curious with reference to last week’s employment report. It said that the US employment rate isn’t going down due to the housing slump because most of the workers being laid off are not American citizens. Their elimination from payrolls doesn’t affect the reported job numbers. We thought we should share.