Things Are Looking Up, But Will It Last?

by George Leong, B. Comm.

Optimism towards the U.S. economy’s ability to pull out of the current recession later this year is clearly a driving force behind the current bull wave up.

On the economic front, a better than expected private jobs report added some optimism. The April non-farm jobs report saw another 539,000 jobs slashed across America, but the positive was that it was the lowest jobs cut in six months. The jobs market is a key to the economic recovery, along with the housing market. U.S. home sales were stronger in March due to the combination of reduced interest rates and cheap housing prices. Construction spending also increased and this may reflect the impact of the government’s massive stimulus program.

There was also positive comments from the Fed that suggest the recession will end later this year. The recent economic signs are encouraging, but we are not 100% convinced of a turnaround in 2009.

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It is nice to finally see traders in a bullish mood. Markets have reversed course from the bear market and are now in an upward trending bull wave. The question is: can it last? I’m mixed on this. On one hand, investor sentiment is bullish, but given the rate of the rebound, I get a sense there could still be a downward move in stocks. We have not seen a major bout of selling since April 20.

The buying has been across the board. On the charts, the tech-heavy NASDAQ and small-cap Russell 2000 are on nice upward trends after the recent breakout. The DOW and S&P 500 have also broken out and appear to be heading higher, but, given the buying, markets are technically overbought, so watch for selling pressure as markets edge higher. Until there is a reversal, the current trends are bullish and reflect a minor bull wave. Ride the wave, but protect your gains with stops. The key during the bear market was patience and riding out the negativity with an eye on the long term.

The charts show upward trending moving averages. At this point, about 48% of all U.S. stocks are above the 200-day moving average, up from 33% a week earlier and from 22% 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.

It is clear that market optimism is increasing, as reflected by some of the technical indicators. Investor sentiment continues to strengthen. The NYSE has been bullish for the past 20 straight sessions, while the NASDAQ has been in 15 of the past 20 sessions, including the last 10 straight sessions. These numbers are encouraging. Trading volume on the NASDAQ and NYSE is also rising, which helps confirm the bull rally and reflects wider market participation.

The investment climate has improved, but not to the point where we can say the buying is totally justified. The reality is that this continues to be a trader’s market. No buy and hold investing here.