— by George Leong, B. Comm.
Markets are looking pretty good at this time following a strong week in which stocks rallied to above respective breakout levels. The DOW has closed higher in six of the past seven sessions, and it is within 1.0% of breakeven as of Thursday’s close. The NASDAQ touched a new 52-week high. We have seen strengthening in market breadth and sentiment along with increased buying, which is what you want to see during a rally.
Decent second-quarter earnings from some key companies are helping to drive the current optimism. IBM Corp. (NYSE/IBM) beat Wall Street EPS estimates, while Google Inc. (NASDAQ/GOOG) also beat the Street’s EPS estimate, but sold off after slower revenue growth. The Bank of America Corp. (NYSE/BAC) reported strong warnings, which will help to add some life to the banking sector. The earnings have been pretty good so far and this has helped to lift the market. About 12% of S&P 500 companies have increased their guidance. There is still a sense that companies will continue to face slowing and may not see concrete improvement until the fourth
quarter or into 2010. In my view, this would be good.
Last Wednesday, markets made massive gains in what was the biggest one-day point gain in the DOW and NASDAQ since December 8, 2008. Market breadth was extremely strong and in fact was the strongest breadth day since March 10, when markets touched a multi-year bottom and turned up. On that day, the DOW was trading at 6,926, while the NASDAQ was at 1,358. I’m not saying that the same will happen this time around, but there is some comparison. I’m not sure if the current rally is sustainable, but the fact that markets were able to avoid a major sell-off is positive.
There is a slight upward rebound in the overall market. As of July 17, about 79% of all U.S. stocks are above the 200-day moving average, up from 68% a week earlier and 69% a month ago. The same goes for the shorter-term moving averages. For the market sentiment to improve, we need to see the moving average continuing to trend higher.
The U.S. economy is showing some optimism, but there continues to be problems in the housing and jobs markets. The unemployment rate is predicted to hit 10% in the U.S. this year. Some pundits have even come out and said that the jobs market will not recover until 2011. President’s Obama’s economic stimulus program is working, but there are signs that it may not be enough to drive up the stalling U.S. economy. At the recent G8 meetings, there was a global call for an increase in stimulus spending to try to give economies another shot to try to get out of the recession.
In Washington, President Obama is trying to get approval for additional stimulus spending, which the GOP has said it will block. The deficit this year is already $1.2 trillion and there is still about four months to go. A decline in government intake from the effects of the recession coupled with the stimulus spending and military commitments is driving the deficit and debt higher.
In the meantime, ride the current uptrend in the market.