Wednesday, March 4, 2009

Bargain Hunters and Bottom Fishers

After a rocky start, US stock indices finally put in a day of solid gains, thanks in large part from the seemingly never-ending supply of optimists seeking bargains after stocks plunge to new lows.

By no means is the recession or the drumbeat of downbeat economic news subsiding. In fact, this latest round of selling - pushing to Dow, S&P and NYSE Comp. to 12-year lows - was possibly the most brutal and merciless yet. Even today, the news was decidedly bad. The ADP Employment Report for February showed that another 697,000 private sector jobs were lost in the month of February. In the good-producing sector, it was the 26th consecutive month of US job losses; manufacturing fell for the 36th straight month, according to the firm.

Inside ADP's numbers was an alarming revelation: that most of the losses were from medium and small firms employing less than 500 individuals. The takeaway was that job-chopping by major firms has peaked, but now the recession is spreading down to smaller firms, even to the very mom-and-pop type small businesses that are the backbone of the economy.

For Wall Street, those figures, coupled with an oversold condition in the market, provided enough of a green light to let the bargain hunters loose, boosting stocks in an overdue, broad rally. At 2:00 pm, the Fed released the Beige Book, an anecdotal accounting which showed economic conditions deteriorating across all 12 regions.

That didn't dampen the mood much, until late in the session, when the Dow shed nearly 100 points in the last 20 minutes of trading.

As the Dow goes, it came just short of the new psychological barrier at 7000, paused and then fell away. That late-day downturn is surely cause for concern going forward, though if the 7000 level is breached, there's not much in the way of resistance until the 8000 level, so the opportunity for a short-term rally exists over the next four to six weeks.

Of course, there are still hurdles to overcome, and the chance that another bank may blow up or some other circumstance contribute to the overall malaise is paramount.

Dow 6,875.84, +149.82 (2.23%)
NASDAQ 1,353.74, +32.73 (2.48%)
S&P 500 712.87, +16.54 (2.38%)
NYSE Composite 4,464.89, +130.19 (3.00%)

Twenty-five of thirty Dow components sported gains, but the five which suffered losses revealed quite a bit about the overall tone of trading. Bank of America (BAC), Citigroup (C), American Express (AXP), General Electric (GE) and JP Morgan Chase (JPM) all have one thing in common. They are either banks or substantially tied to finance in their business operations. JPM took the biggest hit of all, down 8.14%, closing at 19.30, -1.71. The major banks still have unresolved issues and most of them relate back to derivatives and credit default swaps in the black hole of AIG.

Market internals were largely in line with the closing numbers. Advancers clobbered losers for the first time in over a week, 4955-1639. New lows moderated back to 676, though only three (3) stocks reached new highs. Volume remained at the elevated levels of the past week.

NYSE Volume 1,796,873,000
NASDAQ Volume 2,349,450,000

Oil ramped up on news of a surprise drawdown in US supply. Crude futures for April delivery gained $3.73, to $45.38. Gold continued losing, down another $6.90, to $906.70. Gold has lost nearly $100 in just over a week's time. Silver fared better (somebody is obviously taking my advice), gaining 20 cents to $12.92, still bargain territory (under $13 per ounce).

Optimism was abundantly everywhere. All commodity prices were up sharply with the notable exception of gold. This is likely an aberration, as is the stock market move, though there is a technical set-up for a short term bounce.

Stay tuned.

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