Teddy Bloggie Blog Blogging

The stock markets jumped in the past week and a half. I'm not convinced that the worse is over. Here's what I contributed to the m100 journal this week:

For the past seven trading days, the Dow is up 14 percent while the Nasdaq is up 15.5 percent. Gains this week were fueled by better-than-expected earnings from IBM, Microsoft, and Citigroup. However, disappointing earnings from Intel put the brakes on an optimistic market on Wednesday, the only down day since the Dow reached a five year low on October 9th. This mid-October rally has at least lifted the gloom that hung over Wall St. following what seemed like a bottomless September and early October.

As for economic news, the core consumer price index, which excludes the volatile food and energy components, rose a modest 0.1 percent in September. Retail sales slumped 1.2 percent and the volatile housing starts leapt 13 percent in September.

Although the markets have reacted positively to the better-than-expected earnings of recognizable bellwethers, some investors have questioned the latest uptrend. Instead of seeing the latest round of earnings as an indicator of a market turnaround, the bears believe the upside surprises are better explained by the lowered expectations which were announced in September and early October. They would contend that investors are watching a battle between bad and worse with their rose colored lenses on. The bears would point to the deflationary pressure on the economy, the possible housing bubble, and the war with Iraq on the horizon as reasons for caution. Nonetheless, the bulls had the upperhand for the week affecting a shift in broad market sentiment. Charging stock indices along with rising treasury yields indicate that investors are rebalancing their portfolios and are warming to the equity market.

I would add to the economic data that industrial production is falling, the employment picture is still bleak and the Bush administration is trying to take all the teeth out of the SEC. Notice in the above that housing starts jumped 13 percent in September? Even though that statistic is very volatile, it's still the result of the market trying to seek an equilibrium with an overvaluation. It's the most telling trend that there's a bubble here. I feel bad for all those people that are going to be left selling houses at cost or below the cost of construction when this blows up.

In any case, I still think the economy's in terrible shape no matter how the Dow or Nasdaq does in the next few weeks.