The second quarter for 2009 is going to be over in a couple of days. Stocks around the world have done a pretty good job of holding on to their gains. Look at these numbers. England is up 20% from the March lows. Germany is up 30%. The S&P 500 is up 38%. Japan is up 40%. Hong Kong is up 63% while the Chinese Shanghai index is up 41% from March but up 71% off its 2008 lows. For some market analysts the question still remains. Is this a new bull market or just a massive bear-market rally? It is a question worth asking. Momentum in the U.S. markets has stalled and the major averages have been stuck in a trading range the last several weeks. Meanwhile the European markets have begun to roll over. Investors are looking ahead to second quarter earnings. What's your best trade right now?

Daily Chart of the S&P 500 Index:

If you study at the S&P 500 index the trend is still up. Last week's bounce from the 890 level is still a higher low but not by much. Honestly looking back over the last week there has been so many headlines, economic reports, forecasts and opinions that it would be easy to be confused. Here's a recap: Monday the market sold off when the World Bank revised their 2009 global forecast from -1.7% GDP to -2.9% due to a significant drop in world trade and concerns that any recovery would be a lot weaker than expected. Later in the week in Europe the Organization for Economic Cooperation and Development (OECD) revised their global forecast from -4.3% to -4.1%. It's not a big jump and the forecast is still negative but it plays to the trend of conditions getting "less bad".

Over in Asia the People's Bank of China said that the country of China would recover more quickly than expected and raised their forecast from 6.1% growth to 8.0% growth in the second quarter. Next door S. Korea upgraded their 2009 forecast from -2.0% GDP growth to -1.5%. Yet things aren't so hot in Japan, the world's second largest economy. Japan's CPI data came in lower than expected marking the third monthly decline in a row and fanning the flames over deflation fears. Furthermore on June 24th Japan said that their plunge in exports was accelerating from -39.1% in April to -40.9% in May (year over year). Here at home last week's durable goods orders in the U.S. were much better than expected with a 1.8% gain in May versus forecast for a 0.6% decline. Many of the regional surveys in the U.S. have been improving. Personal income, spending and savings here in the U.S. all rose. On Friday Societe Generale raised their forecasts and claims that the recession actually ended in the second quarter. That's pretty optimistic since most economists expect the recession to end in the second half of 2009 and some still look toward the first half of 2010.

We're also seeing mixed signals in the financials. The 19 banks in the stress tests have done a good job raising capital. BAC has even raised an additional $4 billion more than necessary. Some of these banks are beginning to pay back the TARP funds. Yet others are struggling and have halted dividend payments to the government. Taking a wider look at the banking industry the FDIC shut down another handful of banks on Friday. There are forecasts for up to 1,000 banks to be closed in the U.S. before 2012.

Meanwhile the sector that caused this mess is residential real estate and it's not improving. New and existing home sales data remains ho-hum with "distressed" sales (a.k.a. foreclosures and short-sales) counting for 1/3 to 1/2 of homes sold. The Federal Reserve is desperate to keep interest rates and mortgage rates down to facilitate consumers' ability to absorb the glut of homes on the market or refinance their current mortgage. Speaking of the Federal Reserve they appear to be in the "things are getting less bad" camp if you read their statement last week. The Fed didn't come out and say it but the CPI data here in the states hinted at deflation. Nothing scares the Fed more than the "D" word so the Fed will keep rates at these extremely low levels for the foreseeable future.

Regular readers already know my concerns about housing, unemployment and consumer confidence. We've got three months of record high foreclosure filings (over 300,000 a month), which will produce another tidal wave of foreclosures in the next three to six months that could easily swamp the fragile housing market. Unemployment is expected to keep rising well into 2010. While this is seen as a lagging indicator it pressures consumer confidence. If consumers are worried about their job they cut back on spending. Which is why we just saw the personal savings rate shoot to 6.9%, the highest level in 15 years. The U.S. consumer accounts for more than 2/3rds of our economy. If the savings rate went from negative to +6.9% what's that going to do to the economic rebound? It's going to produce a very anemic recovery. With consumers pinching pennies businesses will cut back on orders and lay off more employees, which fuels the vicious circle (see my May 16th commentary). Oddly enough consumer confidence actually ticked higher last month, which makes me wonder if they're saying one thing and doing another. The U.S. is not the only one seeing a slow down in consumer spending. Across the globe governments are noticing a slow down in domestic demand as consumers cut back and businesses slow down and lay off employees.

I do want to point out that last week's bond auctions were successful. The U.S. sold a staggering $104 billion worth of bonds. I'm not going to waste time arguing about the government mortgaging our future. We need the rest of the world to buy these bonds so we can pay for all of our bailouts and stimulus. No one believes that the soaring pace of government debt is healthy but the U.S. is still the best game in town. The big money in the international debt markets has nowhere else to go but the U.S. - at least for now.

Next week there is a lot of economic data coming out but I would focus on four things. Wednesday is the ISM report. After the positive durable goods orders last week the ISM could be positive and help boost investor sentiment. Thursday will bring the June non-farm payroll data. Currently forecasts are for a loss of 375,000 jobs. There are some whispers numbers for even smaller job losses but if the jobs number disappoints it could tank the market. This report comes out on Thursday because Friday is a market holiday. Other than the jobs number investors are going to be thinking about their July 4th holiday plans. We are officially in the summer doldrums. There is a major holiday in front us. Second quarter earnings begin on July 7th but they don't really kick off until July 13th. Volume is going to dry up to a trickle and with extremely low volume we could see increased volatility.

The last few weeks we've been talking about how money managers were waiting for a correction in the market so they could buy it. Any correction was likely to be shallow because there was so much money on the sidelines. I'm concerned that all that money could go on vacation. The quarter ends on Tuesday and Wall Street could become a ghost town on Wednesday and Thursday. Buyers could be hard to find and that sets up the possibility that sellers will be in control. I hope this isn't the case.

In the first paragraph I mentioned the bull market versus bear-market rally question. The consensus on Wall Street seems to be that the lows in March are it (unless you ask Elliott Wave theorists, many of whom believe we will retest or break the lows). Technical traders are mixed. The rising 50-dma crossing above the 200-dma is very bullish. Yet the last couple of months on the S&P 500 almost looks like a partial head-and-shoulders pattern forming, which is bearish. We could be stuck in a trading range for the summer. Thus to answer the question about "what's your best trade now?" I'd have to say the best trade is probably to wait. Just step back and watch. Spend your time building a list of stocks you'd like to buy on a dip just in case we get one.

We're facing a holiday-shortened week with no volume. Even when investors get back from holiday they'll be waiting for earnings season to begin so the next two weeks could be really boring. I'd love to see the trend of higher lows remain intact but a dip to 850 in the S&P 500 would be a 38.2% Fibonacci retracement and would probably be seen as a buying opportunity. Keep an eye on the U.S. dollar. If the dollar continues to slide it could re-start the commodity rally again.

Let me say thank you to the readers that have sent me your ideas on potential LEAP candidates. Keep them coming.

~ James Brown