Published March 28, 2009

A bit of Wall Street cheer before the earnings season

Beyond that, it's anybody's guess as to how stocks will hold up

By ANDREW MARKS
NEW YORK CORRESPONDENT

	Email this article
	Print article
	Feedback

MARCH has been kind to US stocks. The market posted a whopping 12 per cent rise on the month on Thursday after a powerful rally saw blue chips breaking through 7,900 points.

TAKING IT IN With Thursday's rally the Dow is now up 21 per cent from the 12-year closing low posted on March 9

Despite that rise and an early pullback yesterday, Wall Street expects to see US equities close the month with a continuation of the rally that has seen the Dow Industrials bounce 1,300 points since the 6,547.05 close on March 9, the index's 12-year low point.

Thursday's late push to 7,924.56 means that the Dow is now up 21 per cent from that 12-year closing low. In other words, the Dow is in a bull market, technically speaking.

Investors now are clearly considering whether and how much more room there is to run in a rally that still leaves the Dow more than 850 points, or about 10 per cent, below its close on Dec 31, and 44 per cent below its record close on Oct 9, 2007.

Stocks opened lower yesterday. By noon, the Dow was down 103.62 points at 7,820.94.

A pullback is hardly surprising to Wall Street analysts following Thursday's big run-up. 'Giving back one or two per cent today (Friday) isn't a big deal, given how far up we've travelled in such a short time,' said John O'Donoghue, head equity trader at S G Cowen & Company yesterday. 'I expect that absent any significant negative news, the stock rally will resume, if not by the end of Friday, then on Monday.'

Mr O'Donoghue expects that investors who had shifted into defensive stock plays like McDonald's and Wal Mart during the past several months will continue to reallocate into more aggressive investments.

'That defensive trade is coming off, and you're going to continue to see more sideline cash being put to work. Being in cash in an up market is the equivalent of being short right now, and with the end of the quarter almost here, I expect more buying due to window dressing by money managers moving into stocks,' he said.

Beyond the end of first quarter, however, Mr O'Donoghue and many other Wall Street professionals are feeling far more circumspect.

Still, there has been some encouraging signs from economic data and corporate reports of late.

Indeed, a growing list of indicators is pointing to an easing in the recession. Thursday's rally was helped by job news that while dismal was better than Wall Street's expectations.

Yesterday's consumer spending report for February, showing a second straight month of gains, was seen as another sign of stability after six consecutive declines.

'Despite the loss of jobs and income, consumer spending is holding up surprisingly well, that is very positive for the economy,' observed Joel Naroff, president and chief economist at Naroff Economic Advisors.

Still, Mr O'Donoghue reflects the consensus on Wall Street that is cautious when it comes to the rally. 'I'm not sure we've started the next bull market. This is more of a relief rally that the financial system didn't shut down,' he said.

It is hard to see the market continuing to rally much beyond the first half of next week, once the first quarter's been put to bed, analysts said, noting that the first-quarter earnings season is on the horizon.

'After such a massive rally, you're going to see investors start looking for reasons to take some of those gains off the table,' said Jim Awad, managing director of Mercury Asset Management.

And there are still many reasons to be found. 'The fact is we don't know how well the latest bank rescue plan will work, companies are continuing to lose money and lay off workers, and now we're starting to see potential undercurrents of inflationary pressures,' he said.

Indicators to look for over the next few trading sessions are whether the stock market can keep advancing without help from the financials. Thursday's rally was especially encouraging to traders because it occurred without the bank stocks.

Both Citigroup and JPMorgan Chase fell by more than 2 per cent while the overall market soared, after Treasury Secretary Timothy Geithner said the Obama administration will seek to regulate the market for credit default swaps and other types of derivatives.

'The fact that the banks can take one in the chops and you still see the overall stock market making solid gains, that's an important positive for the market and speaks to the fact that a lot of investors feel that we're at least out of the woods in terms of the possibility of real systemic failure in the financial system,' Mr Awad said.