The stock market has produced a bumpy ride this week. Yet so far investors seem to be digesting the bad news without too much turmoil. There was no crash in the Chinese Shanghai market once it reopened from a weeklong holiday. It looks like the multi-day bout of profit taking in the European markets could end with a bounce on Friday. Overall this consolidation is starting to take on a more bullish tone. The big rebound off of Thursday's lows is definitely short-term bullish. We just need to see some confirmation.
While I'm growing more optimistic that doesn't mean we don't have some major issues still in front of us. The debt issues with Greece are heating up again. The country has been suffering protests and strikes from its labor force in response to the EU demanding deeper budget cuts. Bloomberg claims the country needs to pay off or roll over 20 billion euros worth of debt by May 2010. That's going to be an expensive proposition. This past week Fitch downgraded Greece's four major lenders and Moody's and S&P both said they were thinking about downgrading the country's credit rating again. Credit default swaps on Greek debt continue to climb higher. This is putting pressure on the euro, which sank to a new multi-month low against the dollar.
We can probably credit Fed Chairman Ben Bernanke for the benign correction in stocks this past week. Bernanke's semi-annual presentation to Congress was generally positive. He reinforced the view that the Fed would keep rates low for the foreseeable future. More than one analyst believes the Fed will leave rates unchanged for the rest of 2010.
Thank goodness for Ben because without him the new home sales data could have soured investor sentiment. January's new home sales pace was the absolute worst on record! Foreclosures in pre-existing homes continue to flood the real estate market and drive prices lower. Sadly there doesn't appear to be any end in sight for the foreclosure problem.
Bernanke didn't come out and say it but he suggested that the major snow storms that have hit so much of the U.S. these past few weeks could have a negative albeit temporary impact on economic data like home sales and jobs. His point was the weather's impact would be temporary. I just want to warn you that the next few weeks of economic data could be worse than expected.
I am writing this commentary on Friday morning since I'll be traveling the next several days. We have yet to see how the market will react to the GDP revision numbers and the ISM data due out before the opening bell. Economists are expecting U.S. GDP to remain unchanged at +5.7% for the fourth quarter of 2009. Unless there is a serious revision I doubt it will move the market.
Last week I gave you the "wall of worry" pitch and so far bulls look ready to climb it. The consolidation over the last few days is starting to look like a bull-flag pattern. If the market can breakout we could see the S&P 500 make a run at its highs near 1150 (see chart below).
Today's newsletter should be hitting your inbox on Friday, Feb. 26th. As I said earlier I'll be out of town the next several days. The next LEAPStrader newsletter should be delivered around March 9th. You're getting this one a couple of days early and the next one will be a couple of days late.
Chart of the S&P 500 Index:
Weekly Chart of the S&P 500 Index:
LONGER TERM OUTLOOK
Previous Comments on my Long-Term Outlook:
My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.
~ James Brown