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Where and When the Rally?

July 8, 2010 – 3:48 pm

Yesterday’s stock market activity demonstrates the outsized volatility that is still the hallmark of this economic recovery. Stock prices are depressed as many of the largest companies in the S&P 500 are trading at 10 P/Es or less based on earnings estimates for this year. That has very little meaning as investors and traders are reacting to the headline news ready to dump stocks on any hint of less than good news.

There is no doubt the European issue over the last couple of months has had an impact on economic activity. It has caused a slow down in economic activity not because of Europe’s problem but on the ‘fear’ of Europe’s problem. Corporations and consumers, reacting to the news out of Europe, slowed down their spending and that has caused the economic numbers to deteriorate.

The second half of the year is going to have slower economic growth than the first. That has been predicted for some time and as it is happening the stock market reaction has been striking. Meanwhile, profits are at record levels and stock prices at record lows.

At some point later in the year, as the economic activity smoothes out in a slow growth but sustainable level, the stock market will rally. It’s a case of believing or disbelieving in the double dip recession.

Good Trading
Steve Peasley

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