Sunday, August 2, 2009

Recovery, Or Bear Market Rally?

It's true that one can cherry-pick any numbers and find an economist to support any idea one wants to imagine. With the recent upturn on Wall Street, the bulls-versus-bears battle seems to be tilting towards the bulls and a recovery. The question remains; is this the recovery, or is it just a bear market rally preceding another plunge?

Over at National Review, Head Wall Street Cheerleader Larry Kudlow is as giddy as a schoolgirl with a senior class ring. With a 10% rise in the DJIA in July and a 46% rise in the S&P 500 since the March 9 low, he's dreaming of a Dow at 14,000, an 8% growth rate, and a "Reagan rebound." A Reagan rebound? For God's sake Larry, have another scotch and calm yourself.

For a more balanced perspective, there was a good article in MSN Money yesterday by Jon Markman that compares the positions of the bulls and bears. Mr. Markman is decidedly bullish, and to his credit, he says so in his article. Mr. Markman's contention is that some foreign markets are doing well because they are buying American technology. The US tech sector historically leads the way out of recession. The place to buy now, he says, is US technology exporters.

Both articles mention several stocks, so I've been looking through them this weekend, especially the tech sector. I never found a split between foreign sales and domestic sales to confirm Mr. Markman's idea, but I have found some interesting info. Let's take our old perennial favorite Cisco Systems Inc., as an example. It's a good company with low debt and rising revenues. When the recovery comes, they'll be in a good position.

If you've sat on your Cisco stock through the recession, you're probably feeling pretty good right now. If you're looking to buy, there are some cautionary signs here. The top chart shows the daily prices with the 50 and 100 day moving averages (DMA's). The current price is about 2 points higher than the 50DMA, which is a bit high. The higher the spread, the less likely it will remain high. The middle chart shows the price/earnings ratios (P/E) over the last 12 months. It's about as high as it's been, suggesting there may not be room left for growth. The bottom chart shows the slow stochastic, which theoretically is supposed to track long-term trends. Notice that the long-term trends only last about 2 weeks. It's been that kind of year, I guess. In any case, it's heading down. I'll predict that Cisco, along with the rest of the market, is in for a rough week.

A couple of other things I noticed about all the stocks I looked at, both having to do with institutional investors. Every stock, about 15 of them, showed a negative buy/sell ratio among the institutions. This would suggest that the big money is already taking profits and getting out. Also, in the lists of top ten institutional investors, nearly every stock showed a combination of State Street Bank, Bank of New York/Mellon, Northern Trust, Barclay's, and Bank of America; all bailed out banks. I couldn't help but wonder if those billions of dollars invested were actually taxpayer funds that we'll never see again. Could the government be manufacturing a rally to give the impression of a recovery? Trust is such a fragile thing. I'll stick with the bears for now.

1 comment:

LB said...

Very interesting. Now I'm wondering the same thing.