Economic Data Showing Promise

by George Leong, B. Comm.

While President Obama tries to sell his healthcare reforms, it appears that his expensive economic stimulus plan is working its way through the economy. Both the treasury and Federal Reserve have come out and said that the recovery was in place for later this year and into 2010. On the corporate front, Procter and Gamble (NYSE/PG) suggested its sales will pick up in the second quarter of 2010, which coincides roughly to when I feel the U.S. and global economies will begin to ramp up.

The ability of stocks to rally and avoid any major selling since the rally began in early March is positive. Markets continue to rally with steady gains, as the major stock indices have closed higher for five straight sessions. The encouraging sign is that the trading volume over the last two sessions has been strong, which helps to confirm the rally, as more investors enter the buying. During a rally, you want to see mass-market participation.

At this point, the near-term technical picture is bullish, with above-average Relative Strength. Technology and small-cap stocks are showing the strongest technical strength. There is some near-term selling pressure, as markets are overbought. The charts show a breakout at the recent top on higher volume, which is bullish in my view for further gains.

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Investor sentiment continues to be bullish. Investor sentiment on the NYSE has been bullish in 103 of the last 106 sessions (97% during this time) back to April 9. The readings have been extremely bullish at over 90% since July 14, when the DOW was trading at 8,359 and the NASDAQ at 1,799. In the technology area, the NASDAQ has shown bullish investor sentiment in 83 of the last 106 sessions or 77% and in each session since July 14. The positive sentiment will help add support to stocks. The sentiment charts show an upward trend.

We continue to see encouraging positive signs. China reported a rise in its industrial output and investment. A positive for stocks is a continued rebound in the Shanghai Composite Index, as Chinese stocks have closed higher for five straight sessions and the index looks to make a run at 3,000. The renewed buying in China and Europe will help U.S. markets.

In addition, the closely monitored Paris-based Organization for Economic Cooperation and Development (OECD) said that the economies are improving in the 30-country OECD region and there are some signs of recovery in the seven major economies. The OECD composite leading indicator (CLI) jumped to 97.8 in July versus 96.3 in June. For the seven major economies, the CLI was 97.5, up from 95.9 in June. For the United States, the CLI was 96.0 in July, up from 94.4 in June. Across China and Europe, the signs point to an economic recovery.

The key over the next several weeks will be the focus on the economy, as we await the end of the third quarter. Key economic data to watch for this week include PPI (Tuesday), Retail Sales (Tuesday), CPI (Wednesday), Capacity Utilization and Industrial Production (Wednesday), Housing Starts and Building Permits (Thursday), and Philadelphia Fed (Friday).

Hang on tight. If the economic data continues to show promise, the rally could continue.