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Rally or Calm before the Storm?

February 7, 2009 – 4:04 pm

On Monday we had some economic statistics which were not as bad as expected and that helped to move the market off of weakness. These numbers continued to show a weak economy but maybe not a weakening economy. In other words, have we hit a short term bottom in the economy or is this a pause before more bad news comes out? The traders were asking themselves those same kinds of questions. On Tuesday buyers were attracted into the stock market with no economic news and some decent earnings reports.

On Wednesday the ISM report for the nonmanufacturing sector for our economy showed an increase in January over December. The number came in at 42.9 when the estimate was for 39.0. The reading for December was 40.1. Again these are weak numbers as any reading below 50 means our economy is shrinking, but the rate of shrinkage is slowing. It’s like having pain but less pain. Is that good news? On Thursday Factory Orders for December came in with a drop of 3.9% from a revised 6.5% drop in November. Also, productivity for the 4th quarter of last year was up strongly, more than expected at 3.2%. Real income was up 15% and hours worked were down 8.4%. Jobless claims rose sharply again. Overall it is economic pain.

This morning it was the jobs report for the month and at 598,000 jobs lost it was more than expected which was 525,000. No one cared as the market continued to gain strength. Today it appears traders are focusing on the stimulus package which is close to passing and the announcement that the new secretary of the treasury is going to tell us what the plans are to save the banking system.

Last week we hit important support levels for the DOW and the S&P 500 and the market held and bounced up. No one knows when the next rally will begin or when the recession will finally be over. The stock market will start to rally inside the recession, on average between 2 and 9 months and normally about 6 months before the recessions ends. Normally the first run up in stock prices has always been steep. Still, if we break down from these support levels we must exit the market and move to the short side.

This little rally is one to sell in to, not to buy. You should have already bought. Use this small rally to lighten up. Resistance as seen on the DOW chart is around 9,000. This morning it is at 8,200 but you also must look at your individual stocks and if they have risen sharply this week to their own resistance levels, sell.

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