Thursday, October 29, 2009

Positive GDP Growth Sends Stocks Soaring

All of the selling over the past three to four sessions based on fears that 3rd quarter GDP would come in lower than expected turned out to be dead wrong. even the high-and-mighty analysts at Goldman Sachs, who just yesterday downgraded their estimate to 2.7% growth, were well short of the true number, which came in at 3.5%, topping all but the most-optimistic estimates and sending shorts scrambling to cover and other investors cheering the solid results.

It was the first positive GDP report since in a year and the best quarter since the third quarter of 2007, when the recession actually began (though economists will tell you it was the 4th quarter of 2008, the slowdown was much earlier and was being felt in manufacturing especially. The result was the best one-day gain on the Dow Jones Industrial Average since July 23.

Perhaps more important than the nearly-200-point gain on the Dow were the levels at which the NASDAQ and S&P 500 averages closed, ahead of their 50-day moving averages, which were penetrated to the downside on Wednesday. With a solid base at those levels now intact (conceding that it must hold tomorrow), the major indices are aligned for another assault at the highs of the year, erasing all the bad karma from the meltdown of 2008.

On an even more fascinating historic note, the past two days marked the 80th anniversary of Black Monday and Black Tuesday, two of the worst performing days in the history of the stock market. On Monday, October 28, 1929, stocks fell 38.33 points (-12.82%). The Dow Jones Industrials closed that day at 260.64. The next day, Tuesday, October 29, 1929, the Industrial Average fell an additional 30.57 points (-11.73), closing at 230.07. We have come a long, long way since then, but it's intriguing that none of the financial press seemed willing to even mention the anniversary. To say that stock traders and those who report on such activity are superstitious may be putting it lightly.

Dow 9,962.58, +199.89 (2.05%)
NASDAQ 2,097.55, +37.94 (1.84%)
S&P 500 1,066.11, +23.48 (2.25%)
NYSE Composite 6,955.31, +189.62 (2.80%)

Today, thankfully, was nothing like those days of 80 years past. On this day, advancing issues solidly trounced decliners, 4934-1555. New highs rebounded to retake the upper position, beating new lows narrowly, 74-69, indicating that while we may have made a turn, the jury is still out. Stocks could actually vacillate over the next week or so, though most indications are that the rally is back on, using the solid GDP figure as a backstop.

Volume was not spectacular, but solid, in line with other days of the past two weeks.

NYSE Volume 6,477,558,500
NASDAQ Volume 2,251,900,500

What remains to be seen is where leadership is going to emerge. The 7-month-long rally has been fueled by banking, energy, technology and basic materials, correlating in inverse fashion with the dollar (which has been down precipitously and was priced lower today). At some point, the inverse correlation must come to an end, though the transition is not going to be smooth or particularly painless. Sooner or later, the regimen of easy money policy by the Fed is going to change, though that moment is likely 4-6 months in the future. For the time being, traders will look for new star stocks and other positive notes on the economy. With the holidays quickly approaching, consumer discretionary and retail stocks should receive much of the focus.

It's interesting to note the cross-over play with technology in companies such as Apple (AAPL) and Amazon (AMZN), which will likely benefit from strong sales of their leading products, the iPhone and Kindle, respectively.

Commodities also rallied as the dollar declined, snapping a week of dollar increases. Oil was up sharply, gaining $2.41, to $79.87. Gold was up $16.60, to $1,047.10. Silver gained 42 cents, to $16.66.

With no huge earnings news scheduled for Friday morning, investors will have to contend with readings on personal income and spending at 8:30 am, and a Michigan Sentiment revision at 10:00 am. That will probably be just fine with most. The market has covered a good deal of ground over the past four sessions and traders have to be just a little weary as the week draws to a close.

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