Monday was a big day on Wall Street — punctuated by Treasury Secretary Tim Geithner’s plan to remove bad assets from banks’ balance sheets and a report that existing home sales showed an increase of 5.1% for February sales, while analysts had expected a decrease of 0.9%.
The market’s move higher was broader-based, with all ten of the S&P 500’s (SPX) economic sectors up but led primarily by the financial, energy and technology sectors.
Of the Dow-30 (DJI), stocks American Express (AXP) gained almost 19%, Bank of America (BAC) rose more than 26%, and JPMorgan Chase rose almost 25%.
But despite the stock market’s gain, there were many who said that the banks are more optimistic than warranted — considering the pessimistic nature of the private investors who, under the plan, would have to step up and buy the mortgages of the banks with government financing. So determining the true worth of the assets to be sold has still not been addressed and the overall value of the Treasury’s plan is still in doubt.
Still, despite some questions regarding the ultimate success of the government’s new plan to finance the banks, the Dow Jones Industrial Average (DJI) rose 497 points to 7,776, the S&P 500 (SPX) gained 54 points to 823, and the Nasdaq (NASD) rose 99 points to close at 1,556.
The New York Stock Exchange traded 1.9 billion shares and gainers outnumbered decliners by almost 11-to-1. On the Nasdaq, 821 million shares crossed with gainers ahead by more than 5-to-1.
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What the Markets Are Saying
As I’ve said before, bear-market rallies can be devastating to the short sellers because just as it looks like the market is turning lower, a piece of positive news occurs at a time when the market is most oversold and the shorts run for cover.
This usually drives the market higher with a dramatic explosion of buying, but just as the shorts exhaust their panic buying the market turns down and eventually buries any new bulls as it dives to its former low.
According to a study by Citigroup, bear-market rallies last about 3.6 months with an average advance of about 21%. And here is an interesting fact: Four of the 10 biggest one-day rallies in history occurred during bear markets. The last big bear-market rally occurred last Nov. 21 to Jan. 6 for a gain of 24%.
So far, the current rally that started on March 9 is up 21.57% (on the S&P 500) with just 10 trading sessions behind it. Yesterday it was accompanied by modestly higher volume of 1.9 billion shares — not exactly evidence of major institutional participation and certainly not enough volume to penetrate the huge overhead constructed from October ’08 to February ’09.
To qualify as a change in major trend under the Dow Theory, prices must exceed the highs of January at Dow Industrial Average (DJI) 9,088 and Dow Transportation Average (DJT) 3,737, and that’s a long way off.
With all internal and sentiment indicators now grossly overbought, the outlook is for the current rally to slow and then reverse.
The Treasury Department’s proposal needs much discussion and explanation, and it will get that in the press and on Capitol Hill. And shortly we’ll be reviewing the first Q1 earnings, which aren’t expected to be good. It looks to me that there will be many days of angst before this bear retreats to its den.
Today’s Trading Landscape
Earnings to be reported include: American Medical Alert, Carnival Corp & Carnival plc, China Telecom Corp, Comforce Corp, Commercial Metals Co, Compton Petroleum, Deutsche Bank, Jabil Circuit, Robbins & Myers, Universal Power Group, and Williams-Sonoma.
Several economic reports are due including the ICSC Chain Store Sales Index for March 21, Redbook Retail Sales Index for March 21, March Richmond Fed Manufacturing Survey, API Oil Industry Report for March 20, and ABC/Washington Post Consumer Confidence for March 21.
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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.
