At the beginning of the week a lot of technical analysts and veteran stock watchers were convinced they knew where the market was going, at least in the short-run. Stocks were on the verge of setting a temporary top, they said, and the next few weeks would see the beginning of a correction of some of the 40% or so gain from the bottom on March 9.
Well, this week’s rally pretty much scuppered that idea. The Dow Jones Industrial Average and the Standard & Poor’s 500 each gained 7% from the open on Monday July 13 through the close on Friday July 17. And suddenly the chart patterns that were pointing so definitely at a top aren’t pointing much of anywhere at all.
Now far be it from me to look a 7% gift horse in the mouth—even with about 50% of the Jubak’s Picks portfolio in cash this was a very profitable week—but still I wouldn’t mind a little clarity on the market’s direction.
For example, Friday’s up day for the Dow Industrials sure felt like the trends of the week were played out. (Of course, Fridays always feel a little that way as investors who had profits during the week sell so they can relax over the weekend.) The financials and technology stocks that had led the week really couldn’t find much strength and instead it was the energy and raw materials stocks that moved ahead. The market averages moved up largely, I’d say, on a rally in oil based on a decline in the U.S. dollar (oil, which is priced in dollars, tends to go up when the dollar goes down as oil producers demand more of those less valuable dollars in exchange for a barrel) and on a belief that China’s economic recovery, made official when the government announced 8% GDP growth for the second quarter, was real.
Now stock market gains based on a falling currency can’t be called the most lasting of trends. (Although betting against the U.S. dollar does, in the long run, make sense once you look at the state of our balance sheet.) And I wouldn’t bet a nickel on the accuracy of Chinese economic statistics. (Do you suspect that it’s not just a coincidence that government announced that the economy grew at an annualized rate of 7.9% in the second quarter and that the official economic target is 8% growth?) And, gosh oh gee, something is going on in the commodity markets, especially in the market for copper, but no one can tell me exactly what it is. The red metal is red hot but the price gains go way beyond what’s justified by real economic activity in China.
Investors go into next week with another bushel of earnings reports to study—Apple (AAPL), Coca-Cola (KO), Wells Fargo (WFC), McDonald’s (MCD), and Nucor (NUE) are among the industry leaders that report.
But whatever data we get from those reports and whatever conclusions we’re tempted to draw from them, I’d keep one probability in mind: We’ve entered one of those oh-so-dangerous and oh-so-familiar feedback loops in China. Chinese economic reports have been positive enough to produce a huge rally in the Chinese stock markets. Now, however, a rising stock market has become “evidence” that the economy is growing strongly again. That belief has then become another rationale for buying stocks. And a rising stock market then buoys belief in economic growth and so on.