Investment Climate Warming Up

by George Leong, B. Comm.

Markets are largely trading in a sideways channel, unable to break and hold at some key resistance levels. However, the positive is that stocks have managed to avoid any major bout of selling.

So far, in 2009, technology continues to provide the leadership and we expect this to continue, especially now that the NASDAQ has broken up from its sideways channel at 1,680. The near-term trend is positive towards 1,800.

The reality is that the investment climate is far better now than it was a month ago. The markets are trending higher. At this point, about 40% of all U.S. stocks are above the 200-day moving average, up from 31.47% a week earlier and from 17.43% 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

Investor sentiment continues to show signs of improvement. The NYSE has been bullish for the past 15 straight sessions, while the NASDAQ has been in 10 of the past 15 sessions. These numbers are encouraging.

The daily trading continues to be characterized by intraday swings and a lack of a firm direction, and we see this continuing. While there is hope that the recession in the U.S. could end later this year or in early 2010, there remain concerns on the global economies along with the distressed U.S. housing and jobs market.

Moreover, there remains the threat of a potential global outbreak of the Mexican-originated swine flu, which, while it appears to be subsiding, will exert downward pressure on stocks if it worsens and spreads to major economies.

The weak condition of the U.S. economy was confirmed by a weaker-than-expected first quarter GDP report that pointed to a decline at a 6.1% annual rate, much worse than the 4.9% estimated by economists. The GDP contraction has occurred for three straight quarters. The last time this happened was in the 1974 to 1975 period. A positive was a 2.2% increase in the key consumer-spending portion of the report.

The CRB Spot Index, a measure of 22 commodities, appears to have bottomed at 200 and is edging higher, with its eye on the 230 level. Economic renewal would drive up the CRB Spot Index. Watch this as a sign as far as the global economies go.

We are in the heart of the first-quarter earnings season. So far, it has been mixed, with fuzzy guidance. Continue to watch the guidance going forward. Companies have a better idea on demand, as they are in the marketplace. I expect earnings will be weak for at least several more quarters and depending on the economy, they could then begin to improve.

In my view, the key will be how markets trade in the upcoming
weeks. The reality is that there is plenty of cash on the sidelines waiting for some early signs of a market turn. Once that happens, there will be a lot of money to be made. The key is that you want to make sure you have cash on hand to buy at some point in the future.