New York Correspondent
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A FUNNY thing happened on the way to the sell-off so much of Wall Street was anticipating - it never did happen. For one whole day last week it was looking like the red-hot US stock market was finally ready to shift gears out of bullish mode and begin the pullback that so many traders on Wall Street have been expecting, and indeed positioning themselves for, over the past three weeks, as the rally appeared to move into what many top strategists and money managers believe is overbought levels and frothy valuations.
But a sharp decline last Monday is all but a distant memory after a quick reversal that saw buyers quickly stepping in and the resumption of the US stock market rally that has now passed 50 per cent since the March 9 lows.
Now even those who most doubt the market's short term prospects are reluctant to sell, saying that the momentum that has taken stocks to their year-long highs could easily propel the market higher into September.
'You have to be careful about stepping in front of a speeding train like this,' said Joe Palluzi, co-head trader on the equity desk at Themis Trading, LLC. 'You can talk all you want about how the market's valuations appear to have gotten way out ahead of the fundamentals, but the last few weeks anyone who's taken a short position has gotten steam rolled,' he said.
Mr Palluzi is far from alone among Wall Street traders and prognosticators in his belief that the stock market's persistent climb upwards no longer makes much sense given where the economy is and its prospects for the next six months down the road.
'I could argue that stock prices had accounted for the end of recession and weak economic rebound scenario by mid-June. To see the market making gains like this over the past six weeks while the scenario for the economy hasn't improved and we continue to shed jobs, it speaks to a fundamental disconnect that's in place now,' he said.
Indeed, in what appears to be a classic case of the tail wagging the dog, oil analysts attribute much of the recent rise in oil prices, which gushed to highs for the year last week, finishing at US$73.89 per barrel, to investors' bullish desire to buy stocks at ever-rising valuations rather than improving economic conditions. 'Demand has certainly not risen enough to explain why oil is being priced at levels commensurate with strong global economic growth. It's all about the health of the Dow, not the economy,' said Ray Acabone, an oil trader at Apex Options.
Yet stocks continue to defy the growing ranks of bears, with momentum buying putting ever more pressure on traders who have shorted the stock market. Wall Street economist Joel Naroff attributes investors' exuberance to the steady inflow of economic data confirming the end of recession thesis.
'We had the first phase of this rally on hope of a recovery, now we're rallying on the tangible evidence we're seeing. The 'proof is in the pudding' and now that we're seeing the housing market and manufacturing improviing, the global economy's prospects rising, a lot of the reluctant cash that's been on the sidelines is joining the rally,' he said.
The most recent Merrill Lynch fund manager survey, published late last week, showed that money managers turned markedly bullish about both the stock market and the economy in July. 'No matter how worried you may feel about a near-term correction, if your long-term stance is bullish, it's difficult to sell into a rally,' said Mr Paluzzi, who noted that he has stayed on the sideline since mid-June.
That inclination to focus on the positive while ignoring the negative was clearly in place on Friday, as stocks jumped after the best monthly increase in existing-home sales since 1999, and Federal Reserve chairman Ben Bernanke said 'the prospects for a return to growth in the near term appear good', although 'difficult challenges still lie ahead', at the keynote speech for the Fed's annual retreat in Colorado.
The Dow Jones Industrial Average climbed 155.91 points, or 1.7 per cent , to 9,505.96, a new closing high for 2009. The S&P 500 tacked on 18.76 points, or 1.9 per cent, to 1,026.13, its highest close since Oct 6, and the Nasdaq Composite edged up 31.68 points, or 1.6 per cent, to 2,020.90.
For the week,. The Dow charged higher by another two per cent, its highest close since November 4 last year. The S&P rose 2.2 per cent, and the Nasdaq rose 1.8 per cent.
With earnings season over, a wave of economic data highlighting the housing, consumer sentiment and manufacturing sectors will be in focus in the coming week. Wall Street economists believe it's likely this week's reports should continue to tell the same story of improvement that helped propel stocks last week.
This week's data includes S&P/Case Shiller housing price survey as well as consumer confidence and the Richmond Fed survey tomorrow. On Wednesday, durable goods and new home sales are due to be released. Thursday's data includes weekly jobless claims, and a second look at second quarter GDP. Personal income and consumer sentiment are reported on Friday.
The Treasury is also auctioning a near record US$200 billion in notes and bills, and traders will be watching the energy markets to see whether oil continues making new highs.
'It's a matter of time before you get that big swing into bearishness, but in a momentum dominated market like this, there's really no way of saying whether that's going to happen tomorrow, or a year from now,' said Mr Palluzi.
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