A Stock Bottom Doesn't Mean the Bull Is Coming Back

by Eric Roseman

Don't look now, but U.S. stocks are trying to rally. In fact, it looks like stocks are about to muster a bear market bottom this summer.

Here's how I can tell: On Tuesday, we saw more credit-related losses from JP Morgan Chase (JPM) that pushed down stocks. In fact, both the Dow and the S&P 500 Index finished well below their session lows.

Normally, a bad day for banks would result in a much deeper loss for stocks. Gold prices also declined on Tuesday despite a bad session for banks.

Now don't get me wrong; I'm still super cautious at these levels. The credit squeeze is still in full swing and several indicators continue to point to stress across short-term borrowing rates, CDOs, commercial paper markets and declining loan volumes.

But a few developments have occurred over the last few weeks that are undeniably bullish for common stocks.

I'm relieved to see inflationary pressures starting to ease. I'm disappointed to see oil and gold head lower because I'm a long-term bull, but they've enjoyed a sizable advance over the last few years and a correction at this point would be a good thing for the global economy.

Also, the technical picture for stocks in the United States looks much better than foreign markets. Many foreign markets are still struggling and actually are down in dollar terms since the beginning of July. China, the Mother of all Bubbles before last summer, is now down a blistering 53% in 2008.

Once the credit markets eventually stabilize and the government pours even more money into the battered financial system, the stock market will begin to recover. It's highly likely that the Fed will create another "bubble" as investors and speculators return en masse to boost returns in a low-yielding world. U.S. stocks might be the recipient of the next big rally.

The bull, however, isn't coming back.

The conditions won't be in place for a bull market because interest rates are starting from a low base to boost earnings and inflation will remain problematic. Credit stress, a long-term secular event, will also drain corporate finances. But it's fair to assume a big counter-cyclical bear market rally might ensue, possibly taking the Dow above its October all-time high.

The summer is typically a bad time to buy stocks. Yet, as we approach the fall and progress into the fourth quarter, I think we might see a sizable rally following four straight quarterly declines.

If the dollar continues to strengthen, the best strategy will be to focus on the S&P 500 Index (large-caps) and S&P 600 Index (small-caps). U.S. stocks will dominate any rally while international bourses trail on the weight of weaker currencies, especially in Europe.

Comments

[moneysurf:]

I feel the bulls are coming back in the light of what is being said here.

2008 Aug 15 10:47 AM

[Briggsy:]

The Russell has been straight up for the last month. Straight up usually needs a pullback to present one with a suitable entry point. Look for that and then pounce on it.

Incidentally, a bull market and a bear market rally which takes the market to new all-time highs seems like a distinction without a difference.

2008 Aug 15 11:29 AM

[adan:]

all this bullish talk! sounds very contrarian-indicating....

2008 Aug 15 01:45 PM

[adan:]

ps - i should add, if we can get enough of a correction down, a rally up of some significance would be more probable

but hey, that's all rational talk :-)

2008 Aug 15 02:09 PM

[surgcare:]

I'm normally a bull but its hard to see how stocks can keep rising under the current economic circumstances .Its irrational for bulls to forsee a recovering US market based on oil prices and commoditiy prices going down and staying down . THIS MAKES NO SENSE WHAT_SO_EVER .

2008 Aug 15 05:35 PM

[Steven Hansen:]

I understand the market defies logic in its movements, but where would economic traction be coming from? Certainly not from the poor American consumer. If oil prices return to mid 2007 levels, then economic expansion is in order.

2008 Aug 15 07:56 PM

[daytrader:]

bull----!

2008 Aug 22 02:17 PM