Something to Look Forward to

“Calling the Trend” Column, by George Leong, B. Comm.

Markets continue to trend higher, with the DOW breaking above 10,400 and the S&P 500 at 1,100. Small-caps also joined in, with the Russell 2000 back testing 600. Markets have closed higher in nine of last 11 sessions. Investor sentiment is bullish and we are seeing decent support, in spite of the technically overbought condition. We are sensing that traders want to bid markets higher. The CBOE Volatility Index (VIX) has been declining, an indication of potentially more gains, as this fear sentiment indicator falls.

My near-term technical review indicates small-caps as showing the weakest technical strength. The major indices are bullish, but the Relative Strength is neutral across the board, which is a concern. Stocks are also generally overbought, so expect some selling pressure.

Trading volume is somewhat light, which is not we wanted to see during a rally, as it could point to a divergence between price and volume.

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On the plus side, signs continue to point to economic recovery out of the recession. Again the question is the strength of the rebound. The Paris-based Organization for Economic Cooperation and Development (OECD) raised its economic forecast for its 30 members for 2010. The OECD warned that high unemployment could hamper growth, however.

Markets reacted positively to the strong Retail Sales report in October. The positive reading is welcome and indicates consumers may be starting to spend, which in turn will help drive up the GDP, as the economy jumps out of the recession. With Thanksgiving this Thursday, all eyes will be on the malls and on consumer spending. This is a critical period for retailers and could help to dictate GDP in the first quarter of 2010.

The jobs situation along with continued weakness in the housing market will likely continue to make consumers think twice about spending. I feel that consumers may hold back this holiday season and wait for perceived bargains to follow in January, as retailers deal with potential bloated inventory.

Home supplies company Lowe’s Companies Inc. (NYSE/LOW) continues to see slower growth, but the situation is stabilizing. However, housing remains a trouble area, with both the Housing Starts and Building Permits declining in October. Home foreclosures continue to be exceptionally high and much of the housing transactions have been focused on foreclosed properties and not driving up home prices, which is what we want to see. At the end of September, there were about four million homeowners that were in foreclosure or at a minimum of three months behind on payments on mortgages, based on research by the Mortgage Bankers Association.

Add in the problems with loans and credit cards, and you have a situation that could worsen. The holiday season is only a few weeks away, but there will not be rejoicing for many Americans this Christmas. The New Year is encouraging, but I sense that the strength of the economic renewal may be lacking. However, things will improve as we move along in 2010. At least there is something people can look forward to during these drastic times.