Has the Last Bear Died?

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 |  Includes: DIA, EWH, FXY, IRV, IYR, QQQ, SPY, TBT, XHB
by: Wall Street Sector Selector

Has the last bear died?

With last week's decisive breakout to the upside on all the major indexes, it appears that indeed, at least for now, the bears have died and gone to "urus heaven."

Of course, this could just be a colossal head fake and bull trap but all indicators are that a sustained uptrend has started.

We returned to the “Green Flag Flying” mode after market close on Monday, July 20th, as the markets broke through primary resistance at 950 on the S&P 500 and the Dow broke the psychologically important 9,000 level.We expect higher prices ahead with 1000 being the next level of serious resistance, just 2% from Friday’s close.

I'm sure that many trend followers have gone to "buy" signals as a result of last week's action, and even the venerable Dow Theory system, developed by Charles Dow himself, last week flashed a signal for the start of a new primary bull market.

However, in the immediate term, all sectors and indexes are vastly overbought and a correction is very much overdue.

So far this year we have seen that more than 50% of the trading days have had moves larger than 1% while 30% of market days have had moves of 2% or more. The major indexes haven’t seen volatility like this since the 1930s and what makes this particularly unusual is that the VIX, the “fear” gauge or volatility index, has actually been declining and is far below last autumn’s panic highs.

The View from 35,000 Feet

Earnings were the name of the game this week and the markets shook off bad news from Microsoft (NASDAQ:MSFT), American Express (NYSE:AXP) and Amazon (NASDAQ:AMZN), powering higher on hopes for better future earnings.

UPS (NYSE:UPS), considered a bellwether of future economic activity issued a dark outlook on their expected shipping activity and CIT (NYSE:CIT) remains on the brink of bankruptcy as their liquidity situation worsens.

Bloomberg reported that “Dr. Doom,” Nouriel Roubini, sees a risk of a double dip recession next year or in 2011 due to the expanding unemployment rate which he thinks could top 11% and further declines in housing prices and consumer net worth along with a rise in oil prices.

Consumer confidence declined in July over June and the commercial real estate picture is making the news more often as over the next couple of years more and more loans come due for reset. Many analysts are calling this the next shoe to drop and suggest that it will come with a bigger thud than the sub prime debacle that started this whole crisis now two years ago.

Former Merrill Lynch Chief Economist David Rosenberg now with Gluskin Sheff in Toronto writes, “Too much growth-and hope- is priced in at this point.”

Everyone has an opinion, but in the end, it doesn’t matter why the markets go up or down and the only real truth is in the tape.

The Week Ahead

Monday: June New Home Sales

Tuesday: July Consumer Confidence, May Case/Shiller Home Price Index

Wednesday: June Durable Goods, Fed Beige Book Thursday: Initial Jobless Claims

Friday: Q2 GDP, July Chicago Purchasing Managers Index

Sector Spotlight

Leaders: Home Builders, Hong Kong, Basic Materials

Laggards: Treasury Bonds, Japanese Yen

Disclosure: None