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Library Home Street Smart Report Home BEING STREET SMART by Sy Harding CAN THE RALLY CLIMB A HIGHER WALL OF WORRY? April 17, 2009. So
far so good on my prediction of a substantial bear market rally that would be
well worth going after. In just 6 weeks the Dow has gained 24%, the S&P 500
28%, the Nasdaq 31%, the Russell 2000 38%, and the DJ Transportation Average a
huge 42%. That
is an awful lot in a very short period of time, given that the market rarely
makes that much in a year. But
then the rally has had a lot going for it. It
was launched off an extremely oversold condition technically, the selling
brought on by near record levels of investor fear and bearishness. The financial
system had pulled back from a once in a lifetime, or worse, flirtation with
total collapse. The economy was showing some encouraging signs in reports of
unexpected increases in home construction, home sales, and retail sales in
January and February. However,
it looks like the rally will now have to prove itself by climbing a higher wall
of worry. This
week the market was broad-sided by the report that retail sales fell 1.1% in
March, providing no follow through to the encouraging two months of increases
that helped spark the rally. The
market was also hit with the report that Industrial Production declined an
unexpected 1.5% in March, and is now down 13.3% since the recession began in
December, 2007. That's the largest decline since the end of World War II, when
military equipment production was abruptly shut down. It
was reported on Thursday that new housing starts nose-dived 10.8% in March,
while permits for future starts fell 9%, and that mortgage applications plunged
11% the previous week in spite of a big decline in mortgage rates. In
more bad news for the housing sector, major banks warned on Thursday they will
be increasing their foreclosure activity significantly, lifting the temporary
moratoriums they agreed to a couple of months ago (to give the government time
to gets its troubled home-owner rescue plans in place). That is expected to
significantly increase the number of homes on the market at fire-sale prices,
driving overall home prices down further. General
Growth Properties Inc., the 2nd largest mall owner in the country,
filed for bankruptcy on Thursday, indicating how seriously the real estate and
debt problems are spreading into commercial real estate. CitiGroup,
which had been a major spark for the rally when it said in early March that it
was headed for its first profitable quarter in more than year, reported those
earnings on Friday. It reported a loss of 18 cents a share, better than Wall
Street's estimates of a loss of 32 cents. But Citi said that loan losses and
other costs in its credit-card business rose 76%, as its customers continued to
miss payments and default at increasing rates. Those
last two reports feed into expectations a couple of months ago that another shoe
is yet to drop in the financial sector as a result of losses on commercial loans
and credit card debt. But
the stock market rally continued, hardly acknowledging the return of less than
rosy reports from the housing, retail, and financial sector, nimbly climbing the
steeper wall of worry. Meanwhile,
not that many weeks ago pessimists were wondering where market leadership could
possibly come from to support a substantial rally. Instead it's been a battle
between several sectors, notably financials, transports, and technology, over
which can provide the strongest leadership. But
I now suggest caution. The
economic reports for March and early April will be more important than usual,
providing indications of whether the encouraging improvements in January and
February, particularly in retail sales and the housing market, were an
aberration, or were early signs of the economy bottoming. So
far, the latest reports have not been all that encouraging in that regard. I
also suspect that much of the market's positive activity this week was due to
the usual positive influence in an options expirations week. Next
week is liable to be more informative. For now, we have our subscribers still on the buy signal, but we have already taken some profits, and are watching closely to see how the market handles this higher wall of worry.
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