Tuesday, May 26, 2009

Consumer Confidence Soars, Stocks Follow Along

The Conference Board's consumer confidence index recorded its largest gain since 2003, spurring investors to bid up stocks on the first day back from a long holiday weekend.

The index rose to 54.9, up from 40.8 a month earlier. Perhaps the surge in stocks, alongside the government and media effort to talk up "signs of recovery" have Americans feeling a little better about the future. Convincing the millions out of work and those losing their homes in foreclosure actions might be a tougher task. Signs of a rebound in the US economy are hard to come by, though nobody can dispute that the pace of decline is slowing.

Therein lies the big issue. A slower decline is not the same as a rebound, but that didn't seem to matter on Wall Street, as stocks surged close to their highest levels of the past two weeks. The markets are at an interesting inflection point, approaching the interim high between the previous two lows, or a "neckline" spot on the S&P and the Dow. That interim high of 934.70 on the S&P compares to 9034.69 on the Dow, both achieved on January 6 of this year. Breaching that point would signal to Dow theorists a new bull market, though nobody is counting on that just yet. There are still too many issues facing the US economy, not the least among them falling home prices and continuing employment woes, for stocks to stage a continuing rally from this point.

On the housing front, the S&P/Case-Shiller Home Price Index appeared before the opening of the market, sparking an initial downturn on news that the nation's largest 20 metropolitan areas has suffered price declines of 18.7% in March, nearly matching February and just short of the record 19% decline against year-ago numbers in January.

Simple math tells us that unless recovery begins soon - measured by creation of 150,000 jobs per month as opposed to losing 500,000 - home foreclosures will continue to accelerate as more individuals lose their jobs and become unable to meet basic obligations. This is a far cry from the sub-prime issues of 2007-08. Rather, these are prime loans which are going to the courthouse steps in default actions.

Those looking for improvement in the employment section should note that there is no evidence of an improving employment picture and that hiring conditions today are vastly different from recessions of the 70s, 80s and 90s. So, to put matters into perspective, the usually well-off-the-mark general public envisions improvement, but the real data says that is just so much wishful thinking. By the end of this week, when GM either comes up with a viable plan to continue its business or heads to bankruptcy court, the real picture should become much more clear.

Dow 8,473.49, +196.17 (2.37%)
NASDAQ 1,750.43, +58.42 (3.45%)
S&P 500 910.33, +23.33 (2.63%)
NYSE Composite 5,936.58, +146.96 (2.54%)

Today's smashing gains were offset by low volume, suggesting that the broad advance may not have much real support. Advancers led decliners, 5135-1375, but new lows again beat back new highs, 66-57. Volume was moderate. Clearly, the major indices are headed for a critical trading spot. Another surge higher would defy most conventional logic, though this current 11-week-long rally - in which stocks have gained every week save two since mid-March - has already confounded many of the Street's most expert analysts.

NYSE Volume 1,377,798,000
NASDAQ Volume 2,079,289,000

Commodities traded in reaction to the outsize stock gains. oil edged 78 cents higher, to $62.45 per barrel for July delivery, though gas prices, recently surging past the $2.50 mark, are approaching the point at which Americans begin to conserve and tamp down demand. Gold fell $5.60, to $953.30, and silver traded 10 cents lower, at $14.60 per ounce, both of the metals taking a slight breather from their recent rallies.

Up next for the markets are existing home sales for April on Wednesday and new home sales for the same period on Thursday, along with the government's Durable Goods Orders for last month. Those figures are due out at 10:00 am on Thursday.

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