Analysts seeing good signs in market

Sunday, March 15, 2009

NEW YORK -- Investors have seen this before.

Since the bear market began in late 2007, the Dow Jones industrial average has fallen into a pattern of huge declines, big gains and then larger declines. Four times, the market has rallied only to dissipate.

This past week, the market made a fifth stab at recovery, logging its best performance in months after remarks from bank leaders and economic data led investors to believe they'd gotten too pessimistic.

The Dow Jones rallied for four straight days from nearly 12-year lows and gained 597 points. That followed a two-and-a-half month drop in the Dow of nearly 25 percent.

"People have been worried that we're heading into this abyss," said Tobias Levkovich, Citigroup's chief U.S. equity strategist. "There are signs that that's not the case, and there is some floor somewhere -- that we may have overreacted."

But is the worst over?

There's no formula to figure out if this latest rally will stick. But market analysts are watching closely for signs the worst might be behind us, and they say some good signs are starting to pop up.

"There are little subtle things that have happened that are good," said John Kosar, market technician and president of Asbury Research in Chicago. "... But it's way, way, way too premature to try to make an argument that this is 'The Bottom.'"

Here are five reasons the market may have bottomed and five reasons to still fear the bear.

Five signs the market may have bottomed

* Pumped-up volume: Market analysts say two signs of a bottom are the entrance of big institutional investors, because they hold stocks for the long term, and high trading volumes during rallies. Check, and check.

Pension funds, mutual funds and insurance funds began snapping up bargain stocks last week after sitting things out for a while, said Stuart Frankel & Co. president Jeffrey Frankel, who works on the floor of the New York Stock Exchange. And volumes on the New York Stock Exchange on Tuesday, Wednesday and Thursday of last week were about 7 to 8 billion shares -- similar to those when stocks plummeted the week before.

* The economy's bad but could be worse: The U.S. economy might be horrible, but it's not the Great Depression. Unemployment is at 8.1 percent, and expected to rise above 10 percent, but that's nowhere near the 25 percent level experienced in the 1930s. And today, when people are fired, they can collect unemployment. Conditions are a far cry from bread lines.

Plus, the economy's slide appears to be slowing. U.S. retail sales, after stripping out autos, actually rose 1.6 percent in January and 0.7 percent in February.

* Zombie banks? Not quite: Before last week, investors were using the term "zombie banks" to describe the big U.S. banks: Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co.

But last week, these three U.S. banks said they've actually been profitable so far this year. They're also borrowing less from the Federal Reserve now. Bank borrowing from the Fed fell to $19.6 billion last week -- the lowest level since Lehman Brothers collapsed in September, said Miller Tabak & Co. analyst Tony Crescenzi.

* The commodity bounce: It's counterintuitive, but Americans should be happy oil prices aren't falling anymore. After massive price drops alongside stocks over the past several months, crude oil has jumped 16 percent in the past three weeks.

Crude oil and copper -- which has risen 17 percent in three weeks -- tend to be economic barometers, Kosar said. If the cost of industrial metals and crude oil are rising, it means traders see demand trickling back. Growing demand means increasing industrial production.

* Main Street capitulation: People at cocktail parties are talking about how they've moved into cash, and it's usually a good time to buy when regular folks are saying they've cashed out.

"A year ago, everybody was at the dinner table talking about returns," Frankel said. "Right now, it's probably a good time to buy, because usually the masses are wrong."

Five signs the market has yet to find a bottom

* Chronic credit woes: The banks may not be dead, but they're still sick. So are those giant, complicated credit markets. JPMorgan analyst Thomas J. Lee said the markets for securities backed by residential and commercial mortgages have recently deteriorated to their worst levels since Lehman Brothers' bankruptcy.

The market needs a plan for these "toxic assets" -- either by selling them to private investors or allowing banks to mark them differently. A failure by the government to deliver such a plan sparked a sell-off last month, and if investors don't get one soon, the market could be in for another tumble. Analysts aren't ruling out a Dow drop to 5,000, or an S&P decline to 500.

"We don't believe that the bear market's over yet," said Scott Fullman of WJB Capital Group in New York. Toxic assets "either need to come off the banks' balance sheets, or they need to improve on the banks' balance sheets."

* Economic drops are jagged: Economies, like stock markets, don't decline in straight lines. The recent spate of better-than-expected retail sales data could be merely a short-term blip.

Sandeep Dahiya, a finance professor at Georgetown University's McDonough School of Business, said he wants to see three months of sustained increases in the consumer confidence index, which is at the lowest levels since the gauge started in the 1960s.

"Until that happens, I'm not willing to say this thing is behind us," he said.

* Shorts not sweet: A big chunk of last week's rally was driven by what's known as "short-covering" -- when investors buy stocks simply to offset short trades, in which an investor borrows a stock then sells it right away, hoping to buy the same shares back later at a lower price, thus profiting from the decline.

It's difficult to differentiate between short-covering and regular buying, but floor traders last week estimated that between 50 percent and 60 percent of Tuesday's 379-point jump in the Dow was due to short-covering. And a rally driven by short-covering can disappear quickly.

* Fear of the unknown: The market fears something unexpected could happen. The Sept. 11 terrorist attacks threw a wrench in the market's recovery following the bursting of the technology bubble. And an unintended consequence of addressing the Great Depression with protectionism in the 1930s was a global trade war, which hampered the U.S. market's recovery.

* The Bernie Madoff factor: Trust in the markets took a major hit after Madoff's $65 billion Ponzi scheme was revealed in December. It took another blow when R. Allen Stanford's $8 billion scheme came out in February. Without trust, the stock market can't rise for long.

"A lot of people have been beaten and wounded, and it's going to take time to recover from that. It's more than wealth -- confidence has been rattled," Frankel said.

Before jumping in, "everyone is looking twice," Frankel said.

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