Does last week's rally signal new confidence?
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September 7, 2010 

*****The Final Summer Fling?
*****Euro Banks
*****Technical Analysis and Confidence

Fellow Investor,

Summer is now officially over, at least from a business and cultural sense. Kids are back in school, beach retreats are over, and we can expect to see stock market volume return as traders get back to business.

Now, investors will ask themselves if the powerful rally last week was just a last summer fling. Or was it the start of something more meaningful?

The end of summer economic data showed some improvement. Investors were wooed with better than expected employment data. New home sales turned heads. And some proposed tax breaks may cool the summer's heat on small businesses.

But this morning, back-to-the-grind news from European banks sits like the stack of papers on the desk that we've been trying to ignore.

*****The Wall Street Journal is reporting that Germany's 10 biggest banks may need to raise $135 billion in capital to meet new requirements and offset potentially risky loans.

Of course, we knew from the outset that the European bank stress tests were far less stringent than the ones conducted here in the U.S. And we weren't exactly convinced that the standards to which our banks were held were truly realistic.

U.S. banks didn't have much trouble raising the cash needed to shore up their balance sheets. And I doubt the European banks will have any difficulties. If there's one thing of which we can be sure: it's that there's plenty of liquidity available for asset purchases, if the terms are good.

Still, investors will be challenged to recover the spark that drove stock prices higher last week. At least for a day or two...

*****Over the past two weeks, the S&P 500 repeatedly tested support at 1040. That set the stage for last week, when the S&P 500 recovered several important resistance points. 1085 may be the biggest one. But even Friday's close above 1100 is significant. And readers should also note that the S&P 500 moved above its 50 day moving average.

Now, I would like to point out that technical levels like 1085 and 1100, as well as technical indicators like the 50-day moving average are significant because investors believe they are significant.

In other words, if investors feel that a close above 1085, or moving above the 50-day moving average is a sign that the stock market is improving, then they are more likely to be buyers, and the stock market improves.

Investor sentiment and confidence is a self-fulfilling prophecy, as is much economic activity. Businesses hire when they are confident there will be growth. Investors buy stocks when earnings growth looks more certain.

So while 1085 may just be a number, don't underestimate the market's ability to make that number mean something.

*****Oil appears to be selling off today, as are stock prices. But let's remember that both assets, as proxies for economic growth are moving within their established trading ranges.

What's more, both oil and stocks are within the lower third of their trading ranges. The upside is more compelling than the downside. So, if you didn't pick up any stocks when I gave the signal last Tuesday, the dip that's looming should be a good opportunity to get some exposure to a rally that should take the S&P 500 at least 5% to 7% higher.

There is very little economic data on the ledger this week, so it will be investor sentiment that drives prices.

As always, let me know what you're thinking: [email protected].

Until tomorrow,   

Ian Wyatt
Editor
Daily Profit

P.S. I’ve been hearing from readers about a renewed interest in dividend stocks. And with good reason: since late May stock prices are down and have been “yo-yoing” ever since. It’s enough to give the individual investor a case of heartburn and looking for the relative safety of an income stream from dividend stocks. I’ve recently finished research on three great high yield mid and large cap stocks for my Top Stock Insights readers. If you’re interested in getting a copy of the report I issued to them, CLICK HERE.





Posted 09-07-2010 1:57 PM by Ian Wyatt