Reasons To Be Bullish…At Least For A Little While
Sy Harding: After stumbling again in the summer months, the U.S. economy is clearly back on track – if politicians smarten up and prevent it from going over the fiscal cliff.
The recovery is also now being led by the housing industry, which is a particularly good omen. The two main driving forces of the economy have traditionally been the housing and auto industries. That makes sense since when those industries are healthy their good fortune pays forward to their suppliers and peripheral industries like furniture and appliance makers.
The U.S. auto industry began recovering soon after the Great Recession ended in June, 2009, and by many measurements it’s back to its pre-financial meltdown levels.
But until this year the housing industry has had a much rougher time of it; home sales and prices declining further each year, foreclosures and the inventory of unsold homes rising.
The changes this year, and particularly in the last few months, have been dramatic. Existing home sales, new home sales, new construction starts, and home-builder confidence indexes all rising sharply; unsold inventories and the pace of bank foreclosures declining sharply.
Next will come the other side of the widespread destruction of hurricane Sandy in the Northeast – the rebuilding phase.
Not surprising then, the number of new jobs being created each month has been jumping sharply, while the unemployment rate has been falling. Retail sales have been rising, the NFIB Small Business Optimism Index has been rising, consumer confidence indexes have been rising, and inflation remains under control.
Prior to this week, the stock market was concerned about the looming fiscal cliff, with the Dow losing 1,070 points, or 8% over the last two months, and some sectors like utilities and other high-dividend stocks, down 11% to 18%.
But this week the market rallied sharply, the Dow up 3.2% for the week, reflecting mounting confidence that politicians are coming to their senses and will succeed in hammering out a compromise that will either resolve the fiscal cliff threat, or more probably succeed in kicking it down the road to next summer.
So the market has been able to pay more attention to the economic reports.
And it has additional support factors.
The market is now in its favorable season, the winter months, where over the long-term it tends to make most of its gains each year.
There are also signs that corporate managements have become believers again. Corporate insiders, who have been selling heavily, seem to have returned to the buy side. According to Vickers Insider Report, near the market high in September insiders were selling heavily into the market strength, with the insider sell-to-buy ratio just about double its average sell ratio of the last ten years. But last week, for the week ended November 16, insiders had moved sharply to the buy side again, the sell-to buy ratio dropping to less than half its long-term average.
That seems to also tie in with investor sentiment as measured by the weekly poll of its members by the American Association of Individual Investors (AAII), which is considered to be a ‘contrary’ indicator. That is, unlike corporate insiders, who tend to be bearish and selling at rally tops, and bullish and buying at correction bottoms, individual investors tend to have ‘contrary’ sentiment, very bullish at rally tops, and bearish at correction bottoms.
For instance, as the correction from the mid-September top accelerated to the downside, the AAII poll reached a level of 48% bearish on November 11, just over a week ago. That was just days before this week’s rally began. The last time the AAII poll was 48% bearish was on September 22 of last year, just as the big rally of October to May got underway last winter.
Not that the market doesn’t still have a wall of worry to climb.
It was reported this week that the 17-nation euro-zone is now officially back in its next recession. Perhaps more troubling, Germany, the euro-zone’s strongest economy, reported its GDP growth slowed again in the 3rd quarter, to just 0.2%. It’s expected to deteriorate further. James Ashley, economist at RBC Capital Markets in London, says, “The early indications for the 4th quarter suggest that the eurozone recession is likely to continue at least through year-end. And whereas Germany and France provided a partial offset to 3rd quarter overall eurozone weakness, they look set to suffer a fall in the final quarter of the year.”
Also in Europe, the United Kingdom was back in recession this year until its GDP growth came in fractionally positive for the 3rd quarter. But the governor of the Bank of England warns that was due to the one-time economic effect of the Summer Olympics being held in London, and the U.K. economy could be back in negative growth in the 4th quarter.
The U.S. economy can’t offset deteriorating global economies for the long-term, and may run into problems of its own next year. But it looks like a window of opportunity for a typical favorable season rally to next spring, with still enough questions to keep volatility high and investors nervous.
Related: Dow Jones Industrial Average (INDEXDJX:.DJI), S&P 500 Index (INDEXSP:.INX).
Sy Harding is editor of the Street Smart Report, and the free market blog, www.streetsmartpost.com. The Street Smart Report Online includes research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s. It provides two model portfolios as guides. One is based on our Seasonal Timing Strategy, one on our Market-Timing Strategy.