Published June 29, 2009

WALL STREET INSIGHT
See-sawing US stocks smell of self-doubt

Market hitting the half-year mark, but investors are holding back

By ANDREW MARKS
NEW YORK CORRESPONDENT
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STOCKS battled their way to a near-draw last week after starting off with a big sell-off, leaving bulls and bears arguing over which camp has the market's momentum leaning their way.

'On the one hand, we finished the second half of the week strong, with encouraging economic data and surprisingly good earnings news leading the way, but on the other hand even the good news, which included a big dollop of reassurance from the Fed, wasn't enough to overcome a one day sell-off,' said Michael Murphy a technical analyst at Equities Research Advisors.

'It's not decisive to one side or the other, but I'd say the bears have the short-term momentum in their favour right now, with caution being the primary directive for investors,' he said.

In truth, though, stocks appear to have arrived at a standstill as the second quarter draws to a close this week, with few investors willing to make big bets on which direction stocks are most likely to head following a 40 per cent comeback from the first quarter's March lows, and more significantly the gloom and doom mood that had made words like depression, deflation and failure the predominant vocabulary on Wall Street.

The drift to lower and narrow trading range stocks have fallen into in recent weeks has disappointed some bullish analysts, who had been expecting to see the sideline cash in the hands of institutional investors start to be deployed as the second quarter drew to a close.



'We've been unable to break out of these levels as the focus has turned from optimism that we are in fact going to get a recovery to worries that the economy's recovery is going to be a very tepid one well into 2010,' observed Hugh Johnson, chief investment strategist at Johnson Illington Advisors. 'So far the economic data is only showing us that conditions are worsening at a slower pace, and that's no longer enough for the stock market. We need to see signs of a turnaround,' he said.

Indeed, the main topic of discussion on Wall Street is dominated by three letters - L, V, and W - as in which shape the economic recovery will most resemble. And the prevailing view is that an L-shaped, or flat-recovery is the most likely scenario. Not exactly the stuff of which bull markets are made.

'It's hard to get too enthusiastic about the overall market after a 40 per cent rise off the bottom's taken place and the catalyst for the next move upward isn't really clear,' Mr Johnson said.

Talk of a summer fade for stocks has been gaining currency in the last week or two, with some analysts, such as the equity team at JP Morgan Securities, forecasting that the S&P 500 will sink as low as 830 come September, a dip of 89 points, or 10 per cent from last Friday's close.

But bullish analysts maintain that improved third quarter outlooks from corporate America in the upcoming earnings season, and signs of growth in the economy will get stocks back into rally mode by mid-July.

On Friday, stocks ended mixed, reflecting the mixed message on the economy delivered by the two most important data releases that day. An unexpected surge in consumer confidence was countered by word that Americans are keeping their money in their pockets, as the savings rate climbed to 6.9 per cent , the highest level in 15 years.

The Dow Jones Industrial Average lost 34.01, or 0.4 per cent, to close at 8,438.39 points. The S&P 500 fell 1.36 points, or 0.16 per cent, ending the week at 918.9, while the tech-heavy Nasdaq gained 8.7 points, or 0.5 per cent, to 1,838.2.

For the week, blue chips turned in a loss of 1.19 per cent, the second straight losing week for the Dow, while the S&P 500 slipped a mere 0.25 per cent, and the Nasdaq Composite managed a 0.59 per cent gain.

Stocks will be putting the second quarter to bed tomorrow and starting the second half of the year on Wednesday with several important economic reports due in the coming holiday shortened week, which will see the stock market closed on Friday in honour of Independence Day.

The most anticipated piece of data is the June employment report, due out on Thursday, but many economists will be looking closely at Wednesday's release of the national survey of manufacturing by the Institute of Supply Management for June.

Economists were pleasantly surprised last month that the May industrial production numbers showed new orders above the key 50 level, despite the auto industry cuts. Last week's estimate beating durable goods number was another harbinger of economic recovery, rather than just a 'less-bad' scenario.

A repeat for the ISM data this month will be a strong indicator that the recession could end as soon as the third quarter, economists said.

'Investors seem to be getting impatient and uncertain about the economy's recovery, but these numbers tell me we are solidly on track to see a positive number for GDP for the third quarter,' said Citigroup economist Steven Weiting.

Tomorrow will bring the release of the S&P/Case Shiller home price index, the Chicago purchasing managers report and consumer confidence numbers. Pending home sales are due on Wednesday, along with the ADP employment report, construction spending and monthly auto sales.

After the tech sector got a boost last week from Palm's estimate-walloping numbers, it's a quiet week for earnings, with only General Mills and H&R Block scheduled to report quarterly numbers.