Monday the major indices made their largest single day move in six weeks[1]. The decline was fairly consistent throughout the day, and the indices closed essentially at the day lows. Bank of America’s pre-market earnings announcement Monday appeared to be the selling catalyst. Even after Monday’s huge decline, the Nasdaq Composite[2], remains positive year-to-date.
The leading indicator[3] release during the day Monday added to the decline as the indicator lost 0.3% last month. According to the release, “the recession has been long and with no end in sight though whether it is deepening in intensity is still unclear.” The indicators that decreased last month were building permits, vendor performance, factory workweek and jobless claims. It is not a surprise that jobless claims continue to decline as employment is generally viewed as a lagging indicator. The jobless claims report attempts to provide more timely information than the employment situation[4], but neither should forecast the direction of the economy. The two indicators that showed the most improvements were interest rates spreads and money supply which attempts to reflect active government intervention to stimulate the economy. These two factors reveal much more than the other indicators do about the state of the economy. In general governments attempt to spend their way out of economic contractions. Read my blog post for further analysis on the history of U.S. Recessions https://marketfallacy.wordpress.com/2009/04/20/1000-point-rally-coming/. These two indicators suggest the government is willing to do anything necessary to end this economic contraction, even at the possible expense of future Americans. Whether this is the government’s role is topic for another article.
AT&T, Boeing and Apple all rallied following the release of their earnings announcements. Of the three companies, AT&T was the only one to actually beat expectations, but Boeing and Apple provided commentary suggesting the current economic conditions are not as bad as perceived by the majority of Americans. High-end or luxury goods are showing increased sales which implies the wealthy are bargain hunting. This behavior is the pre-requisite to an economic recovery. Spending has to increase, and the easiest market for it to increase in is in high-end or luxury goods. As more companies report over the next two weeks, the outlook for the future will become more clear.
Although the market gapped down huge Monday morning, the major indices showed much resiliency Tuesday bouncing back and reducing significant amounts of Monday’s losses. Until the last hour of trading on Wednesday, the indices recovered most the losses from the early parts of the trading session, but were unable to sustain the rally. However, the Nasdaq did remain positive on the day. Small cap stocks[5] and technology companies[6] will continue to lead this rally.
Market Fallacy expects the major indices to end the week higher and add to the consecutive week streak. From a technical aspect, if the SPX can close above 875[7], the trend will be significantly higher. Market Fallacy expects another 15% increase before any significant retracement or consolidation period. As evident by Tuesday’s movement, this rally is not ready to end. The bears have had every chance to take the markets lower, and have had no such success. Monday’s decline was healthy and extremely bullish. Market Fallacy now has a blog, which will attempt to provide insight into individual questions concerning the markets. Please visit the blog to receive personal attention regarding the markets.
[1] SPX synonymous with S&P 500 lost approximately 4%
[2] Nasdaq Composite is a stock market index of all the common stocks and similar securities listed on the NASDAQ stock market, YTD up approximately 4%
[3] A composite index of ten economic indicators that should lead overall economic activity
[4] Employment situation releases the unemployment percentage whereas the jobless claims reports the number of of individuals who have filed for unemployment insurance for the first time
[5] Small capitalization stocks can be tracked by the Russell 2000
[6] Technology companies can be tracked by the Nasdaq
[7] Intraday high and now upside resistance
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