Turnaround or Bounce? Look to the Banks

Last week’s positive move in the stock market was overdue, but it is unclear whether this is the beginning of a turnaround or merely a bounce from oversold conditions. There is some evidence that market conditions are improving. Last week’s rally was broad-based and volume was heavy, which are strong technical factors. Additionally, lower-quality stocks have been outperforming, which typically happens as markets turn around. However, it is very possible that we are still bottoming-out.

There was good economic news last week. Retail sales figures were surprisingly positive. January’s data was revised to show that sales actually rose, and February’s numbers were down only slightly. All told, it appears possible that overall first-quarter retail sales growth will net out to around zero, a much better scenario than was widely anticipated only a few weeks ago.

On Tuesday, there was more good news. An unexpected rise in housing starts and a more moderate increase in wholesale prices point toward a brighter economic outlook. Another plus, the market appears to have leveled off before the recently-passed stimulus package has started to have any effect.

That said, the overall economic environment remains troubled, and as Federal Reserve Chairman Ben Bernanke said last week, “Until we stabilize the financial system, a sustainable economic recovery will remain out of reach. In particular, the continued viability of systemically important financial institutions is vital to this effort.” The banking system needs to stabilize before we see a full recovery.

Comments

[AndrewBaker:]

I agree: financials need to be sorted out before anything else can truly get going, but the sector is going up on nothing concrete, and there are still bad assets out there yet to come home to be properly counted (valued). I'm worried that this financials rally will falter and cause big falls all round as a result.

Mar 18 01:12 PM

[Dave Wrixon:]

I think the only question you need as is, how severe the run on the dollar will be when it comes?

Mar 18 02:40 PM

[Dave Wrixon:]

Or to put it another way, Why is Madoff in Jail and Greenspan walking the streets?

Mar 18 02:44 PM

[rakehell:]

this train has left the station
we have seen the bottom
you now have performance anxiety -- enjoy!

Mar 18 03:56 PM

[Mad Hedge F...:]

It's looking more real by the day. The quality of this rally is convincing some investors that this could be the big one. After financials (XLF), which are having an obvious dead cat bounce, the leaders of the past week have been the sectors that led into this recession, like consumer discretionaries (XLY), retailers (RLX), and home builders (HGX). The chart of Home Depot (HD) tells the whole story. These are exactly the sectors you would expect to move in a new bull market

Mar 18 08:50 PM