Sharp Rally Ends Softly on GDP Worries

US stock indices were up sharply early in the day on nothing in particular, though a more technical outlook might have foreseen the advance in the making after four days of sluggishness and little movement in US stocks.

The NASDAQ soared above 2000 for the first time since October, 2008, a span of ten months. The Dow and S&P reached 9-month highs during the session. Pent-up demand and an extension of the 5-month-long rally pushed stocks to their best levels of the year and had investors cheering despite contrary economic indicators and

Initial unemployment claims came in at 584,000, a touch higher than expected and a fairly sizable leap from the revised 559,000 of the prior week. Unemployment continues to be a key issue, though stocks don't seem to mind the unusually high levels of joblessness, probably a serious mistake.

In earnings news, markets were bolstered by positive developments in Avon Products (AVP), which saw profits plunge, but recruitment of sales representatives grow by 11%. Despite the poor quarter, the company actually bettered expectations and also announced layoffs of 1200 office staff. The stock trader up 2.41 (8.2%) on the news.

Other companies beating street estimates were Barrick Gold (ABX), health insurer Cigna (SI), Medifast (MED), Dow Chemical (DOW) and OfficeMax, which narrowed its quarterly loss by implementing a severe cost-cutting effort across the company.

Generally speaking, most public companies are weathering the recession better than the average consumer, though companies are narrowing losses or turning profits more from cost-cutting, labor force reductions, inventory depletion and other intra-company disciplines rather than increased sales. Most companies reporting this quarter have shown revenue declines from year-ago periods.

Those corporate results are what have many analysts baffled. With a healthy recovery nowhere in sight yet, stocks continue to gain in almost all sectors. While profits are still attainable, they have come on the heads of hourly or salaried workers or at the expense of organic growth. Profit expectations have been lowered nearly everywhere; still, the market gallops ahead as though the country were in a boom rather than at the mid-point of a major bust. There is likely to be a backlash and second leg down to price in the realities of a smaller overall economy in which companies are hardly flourishing but rather just hanging on.

Dow 9,154.46, -83.74 (0.92%)
NASDAQ 1,984.30, -16.54 (0.84%)
S&P 500 986.75, -11.60 (1.19%)
NYSE Composite 6,384.31, -103.74 (1.65%)

Late-day selling (after 3:30 pm) wiped out more than half of the gains on the major indices, however. The Dow, which had been up 175 points, finished higher by just 83. The NASDAQ drooped back below 2000 and the S&P failed to reach the magical 1000 mark. Advancers still beat decliners handily, 4784-1586. New highs skyrocketed to 267, versus just 106 new lows. A sign of the Wall Street mania could be seen in Starbucks (SBUX), which recorded a new 52-week high. Volume was improved over previous sessions, but was still not what would be seen in a serious bull market rally.

NYSE Volume 1,358,965,000
NASDAQ Volume 2,557,626,000

Commodities did an abrupt about-face in light of the positive tone on Wall Street. How much the street influences action in raw materials and other commodities is unknown, though today it seemed to be a major factor. Oil for September delivery rebounded $3.59, to $66.94. Gold spiked $7.60, to $937.30 and silver gained 23 cents, to $13.49. The sudden surge in prices may have had more to do with attitude than reality. Oil demand and gas usage is down, and unwinding upside-down positions may have influenced today's commodity action, though strong demand for a 7-year note auction by the Treasury was seen as a major positive. The debt machine continues to pump nearly non-stop, as though there is no limit to the unprecedented credit creation which is supposed to save us all.

The final numbers from Wall Street - especially considering the halving of gains in the final half-hour - were in anticipation of a major announcement tomorrow morning. At 8:30 am, the government announces preliminary second quarter GDP, the most relevant gauge of growth available, and it became obvious that there are some jangled nerves anticipating what many expect to be a very positive - though negative - number. The self-appointed "experts" say the economy shrank at the rate of 1.5% (annualized) in the three months ended June 30. That would be an enormous improvement over the average of 5.9% from the previous 6 months.

A negative growth rate ensures that the nation is still in recession, though the smaller number would indicate that conditions are improving. What that means as far as the second half of 2009 and all of 2010 are concerned is a matter of great conjecture. Nobody knows what the future holds, but most straight-thinking economists don't expect a very robust recovery. Of course, many of them have been wrong before, but tomorrow's opening bell should be a real loud clanger.