Speculation and Expectations

by George Leong, B. Comm.

The market is all about speculation and expectations. The major reason for the eight-week rally is linked to increased optimism regarding the U.S. economy’s ability to reverse course and grow later this year. The Federal Reserve believes the economy can grow sometime in the second half; but, while it could happen, do not expect a high growth rate. GDP growth could be flat at best.

I feel that 2010 will more likely see stronger GDP growth, but it may not occur until the later part of the year. The key will be the impact or multiplier effect of the government’s economic stimulus plan and if it drives consumers to spend. I’m uneasy on this since, as long as jobs and housing are weak, there would be little reason for consumers not to want to save instead. If the savings rate continues to rise, it could take a chunk out of the economy and force a longer recovery. Should this happen, stocks could languish sideways or move down. Markets do not like to see disappointment, and so far the rally has been based on optimistic speculation and not real data of a strong turnaround.

At this point, the major stock indices are hovering at or above key resistance levels (DOW — 8,400; S&P 500 — 900-950; NASDAQ— 1,680; and Russell 2000 — 485).

The selling pressure is not unexpected, given there continues to be market risk. What is important is that a downward trend does not materialize.

An interesting development on Monday was a pause in the investor sentiment readings. After going 21 bullish straight sessions dating back to April 9, the NYSE showed a neutral reading today. The NASDAQ also broke its 12-day winning streak after recording a neutral reading today. Trading volume was down on the NASDAQ, which is positive on down days.

As we move forward, watch how markets trade, as it could indicate the direction for the next several months.

There must be leadership to drive the markets higher after the recent breakout. Technology stocks have been the leaders so far this year. Recently, the financials have been offering some leadership. There are currently dilution concerns with the banks’ stock offering plans aimed at increasing capital requirements under the Stress Test. Yet there are positives. The news that Citigroup Inc. (NYSE/C) was using TARP funds to make new loans is positive and is exactly what the Obama administration wants to happen. Bank stocks continue to be trades and not buy and hold stocks.

The key now is to have funds available for trades. There are some decent valuations out there. If markets dip, it may be an opportunity to accumulate shares. At some point over the next year or so, there will be some major money to be made once the turnaround is certain.

At this juncture, the charts continue to point to higher moves, albeit there will be selling pressure. Ride the bull wave, but don’t forget to take some profits along the way or move up your trailing stop-loss levels as stocks edge higher.