This Year Better Than Expected

Monday, August 3rd, 2009
By George Leong, B.Comm. for Profit Confidential

— by George Leong, B. Comm.

I think this year is turning out to be far better than many thought in January, including myself. On Thursday, the NASDAQ broke above 2,000 for the first time since October 2008. In addition to technology, the rally is broadly based, as the S&P 500 is flirting with the 1,000-point level. Growth stocks are also continuing to attract buying interest, as the Russell 2000 is faring better than both the DOW and S&P 500. Optimism towards the end of the recession is helping to fuel small companies.

So what’s the deal? Yes, the March lows have no worries of being tested; at least that is my feeling now. The recent break below the various breakout levels was short-lived, as stocks quickly rebounded in an 11% rally that is still in play.

Market breadth and sentiment are bullish. Trading volume is average, which is not want we want to see in a rising market. You want to see more market participation on rallies.

Yet, as we move forward, we expect more scrutiny and selling pressure, as stocks are bid higher. The markets are showing some signs of pausing with traders and investors deciding on whether to take stocks higher.

The economy and whether the recession will end in the third or fourth quarter of this year or extend into 2010 are still at issue. There is some hesitancy to drive stocks in either direction.

In my view, there two ways of looking at the market action of the past three sessions following the DOW’s move above 9,000. Traders appear hesitant and may be waiting for direction. We may be seeing a pause in the market before stocks move higher or stocks may fail to move higher and reverse to the downside.

The economy is showing evidence of improving, especially on the distressed housing front, which could see more downside weakness before rebounding sometime in 2010. Conversely, the Durable Goods Orders for June contracted 2.5% versus a 0.6% estimated by economists. Yet excluding autos, the number actually increased 1.1% in June, better than the flat reading expected and above the 0.8% increase in May. The positive is that the reading has shown a positive increase in two straight months. There need to be sustained positive readings for us to get more comfortable towards the economy.

The weak consumer confidence report on Monday was a disappointment, but not a surprise, given the continued concerns in the jobs and housing markets. The Consumer Confidence Index came in at a disappointing 46.6, down from 49.3 in June and below the estimate of 49. The weak reading was driven by continued worries about jobs and housing. As we said, the news is bad, because consumer spending accounts for about 70% of GDP. The fact that stocks are holding in spite of some weak earnings and consumer confidence data is encouraging in our view.

Oil continues to edge back towards $70.00 a barrel, but is stalling. Gold moved above $950.00 an ounce prior to a retrenchment to the current $930.00. Commodities are moving higher on economic
optimism.

I remain cautiously positive at this point, but also anticipate some profit-taking given the overbought condition. I feel that gains may not be sustainable or markets will sell on further gains given the continued uncertainties in the housing, jobs, and retail sectors.

In the meantime, ride the rally, take some profits, and watch your stops.

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George is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. His trading advice on stocks and options is also found on his daily trading site, Daily Profits. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services.