Published August 31, 2009

WALL STREET INSIGHT
US rally may finally run out of gas

But major sell-off not in the offing as buy orders pour in on any pullback

By ANDREW MARKS
NEW YORK CORRESPONDENT
Email this article
Print article
Feedback

THE latest phase of the six-month long US stock market rally has shown remarkable resilience, as momentum driven trading continues to defy arguments that stocks are now overvalued by as much as 25 per cent.

Break time: Many senior traders will be heading off to the mountains or the beach this week - the last week of summer leading up to next week's Labour holiday - leaving the field to retail investors

But the calls for the rally's demise are growing with the first trading session of September looming tomorrow.

'These kinds of rallies, with so much momentum behind them, and so little breadth, can go on much longer than most people expect, but we're running on fumes here, and sooner or later, this market is going to correct,' said David Rosneberg, chief economist and market strategist at Gluskin Sheff, who believes that 'sooner' is about to arrive.

'Even if the recession is over, the market usually is up no more than 20 per cent from its lows at this point in a recovery,' observed Mr Rosenberg, who believes stocks are currently fairly valued for an economy with 5 per cent growth and rising employment.

'It won't take much of a push at this point to make investors decide to pull out,' he said.

More bullish strategists would point out that it is unhelpful to compare the market's current bounce off the March lows to other stock market recoveries from recessions.

'Those lows were based on far more than a steep recession, back in March the stock market was pricing in the very real possibility of a depression and outright collapse of the financial system,' noted Marc Pado, chief market strategist at Cantor Fitztgerald.

While not arguing the widespread belief that the stock market is due for a pullback of some sort after the precipitous rise of the last seven or eight weeks, Mr Pado, like many Wall Street analysts who are in the camp that believes stocks are in the early stages of a new secular bull market, is anticipating a more modest round of selling in September.

'I think we do get some retrenching before the market trends sideways until third quarter earnings season gets under way in mid-October,' he said.

'Barring unforeseen events - and given the global economic environment I am not dismissing that possibility by any means - I think earnings in the second half of the year will continue to show sequential improvement and that means companies should keep beating estimates,' said Mr Pado.

In the meantime the coming week promises to be both quiet and volatile, a seemingly contradictory pair of characteristics unique to the last week of the summer leading up to next Monday's Labour holiday in the US.

'All the senior professional investors and traders are heading off to the beach or the mountains this week, leaving the field to retail traders and investors,' said Steven Skolnick a trader at Viking Capital Management.

'That's always a time for very low trading volume and in unsettled times like this a recipe for big swings from one day to the next,' he said.

Word on the Street, however, is that a major sell-off is not in the offing in the next couple of weeks, because many institutional traders who've kept their cash on the sidelines during the surge have buy orders programmed and ready to snatch up stocks on a pullback.

'We might get some noise with big intraday swings but I think we'll probably get results like last Friday's, where the indexes see-saw back and forth but end the day about where they began,' said Mr Skolnick.

It also doesn't hurt the stock market when investors watch bond yields, which move inversely to price, drop to their most unattractive levels in months. The yield on the 10 year treasury note closed at 3.46 per cent last Friday, far off the 3.85 it reached in early July, making it a less attractive alternative to stocks.

Stocks finished Friday's session mixed, as tech shares rose on Intel's raised revenue guidance, but most other sectors suffered losses as personal income data for July came in below expectations, although the University of Michigan's August consumer sentiment report came in slightly ahead of estimates.

The Dow Jones Industrial Average lost 36.43 points, or 0.38 per cent , at 9,544.20, halting its eight- session winning streak. The S&P 500 dipped 2.05 points, or 0.2 per cent , to 1,028.93, while the tech-heavy Nasdaq Composite eked out a small gain of 1.04 points, or 0.05 per cent to 2,028.77.

For the week both the Dow and the Nasdaq each rose 0.4 per cent, and the S&P 500 added on 0.3 per cent. For the month, blue chips are currently up 4.1 per cent.

The relative quiet of the coming week could be punctured by Friday's jobs report for August.

The consensus among Wall Street economists is that the economy lost between 225,000 and 250,000 jobs, but recent weekly unemployment claims are hinting at a higher number, which could inflame investors, already concerned that the market's recovery has gotten too far ahead of the economy's.

Investors will have a wealth of other data to pore over before the big employment report on Friday. Today starts with the Chicago purchasing managers report. The ISM's key manufacturing data is due out tomorrow, as are pending home sales, construction spending, auto sales, and the Fed's minutes.

On Wednesday, ADP's employment report, productivity and costs and factory orders are reported. Weekly jobless claims and ISM non-manufacturing are released on Thursday.