Published June 1, 2009

WALL STREET INSIGHT
Investors looking to key data to push stocks higher

Analysts expect more funds to enter market on evidence of stability, growth

By ANDREW MARKS
NEW YORK CORRESPONDENT
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WHEN push came to shove on the final day of trading in May, investors bought into the two-month-long rally that has swept the major US stock market indexes from sickening losses into hopeful gains in the space of ten weeks, a good sign of things to come over the next four weeks for a market that has been drifting sideways of late.

'The gains we saw were very nice, but this week was more significant for what those gains mean in terms of investor psychology and sentiment,' said Marc Pado, market strategist at Cantor Fitzgerald.

Fund managers and institutional investors, still cautious over whether to commit to the notion that current valuations are well supported by economic data that point to a recovery by the year-end, appear to be hedging towards the bullish side of the argument, a tipping of the balance that would mean big upside for the short-term bull market.

'Friday's rally was about money fund managers doing end of the month fund rebalancing, which foreshadows the more significant rebalancing that takes place at the end of every quarter,' noted Mr Pado, who believes that evidence of stability and eventual growth in the economy will convince institutional investors to get on the bullish bandwagon as the second quarter draws to a close in June.

'Barring any major change in the way the economic data is trending, I think we'll see more days like today (Friday), where bullish sentiment prevails than we see of days like last Tuesday, when doubts over the recovery and the rally resurfaced,' he said.



Although some institutional money came into the market in April, at the beginning of the new quarter, most of it has been kept on the sidelines, in cash and short-term debt, says John O'Donoghue, chief equities trader at S G Cowen. 'Most of the run-up has been due to a strong wave of buying on the retail side, with big inflows to US equity mutual funds since late March.'

Bringing institutional investors on board in more enthusiastic numbers could mean an additional 5 to 10 per cent worth of advances for the S&P 500 by the end of June, some analysts estimate.

To be sure, the bullishness evidenced in last week's trade is far from a sure thing going into the new month. The traditional 'Sell in May And Go Away' psychology may still very well exert its influence as the market heads into the summer months, especially following a rally that has pushed the S&P 500 close to a 40 per cent gain since March 9.

And with an economy that is far from out of the woods yet, any significant break in the trend toward recovery in the economic data flowing in over the next few weeks could swiftly bring the bear back to Wall Street, traders said.

On Friday, the economic news continued to support the recovery scenario, as the Commerce Department revealed that GDP decreased at an annual rate of 5.7 per cent in the first quarter of 2009, less than the original estimate for a 6.1 per cent decrease, and the University of Michigan Consumer Sentiment Index increased to 68.7 from 67.9, slightly better than expectations for 68.

Investors responded by sending the Dow Jones Industrial Average up 96.53 points, or 1.2 per cent, to 8,500.33, while the S&P 500 rose 12.31 points, or 1.4 per cent, to a close of 919.14. The Nasdaq Composite gained 22.54 points, or 1.3 per cent, to end the week at 1,774.33.

For the week, the Dow advanced 2.7 per cent, the S&P 500 picked up 3.6 per cent, and the Nasdaq led the way with a 4.9 per cent rise. The strong week gave the indexes a good showing for May, with blue chips up 4.1 per cent, the S&P 500 higher by 5.3 per cent, and the Nasdaq showing a 3.3 per cent gain.

The coming week will probably start off dominated by the widely expected bankruptcy of General Motors today, but the economy will take over the spotlight by mid-week, ahead of a key jobs report on Friday.

Investors are waiting to see if the data evolves into more positive territory, from 'less bad' numbers to 'on the way to good' numbers in order to fuel the next leg up, traders said.

Personal income and spending data for May, along with the ISM manufacturing and construction data is due out today.

Last month's pending home sales and auto sales are reported tomorrow, and Fed chairman Ben Bernanke testifies before Congress on Wednesday. Investors will be listening in for clues to the June 23-24 Federal Open Markets Committee meeting.

Wednesday also brings ISM non-manufacturing numbers, and the ADP's private sector employment report, which traders will look on as a strong hint of the biggest data point for the week, the government's May jobs report. Economists are expecting the Labor Department will report companies cut about 550,000 jobs in May, slightly more than the 539,000 in April.