Market Comment - March 28

(Marco Bonelli) Real rally - fake rally, does anybody care?

The word "accommodation" is getting big attention these days and - like almost all other issues - experiences the whole range of interpretations. In most minds, it was the equivalent of QE3 and was assigned the responsibility for Monday's rally. Or maybe it was just the trigger or excuse to play the catch-up game in performance and secure one of the best first quarters in history, coupled with a little bit of short-covering from all those day-traders who - like many other market participants - expected a short-term pull-back.


But didn't we already see this pull-back? Sure it was short and by the time everybody talked about it earlier this month, the averages already regained the lost ground and even broke out to new highs. More specifically, after two weak days beginning of March, the Nasdaq showed the strongest performance among the major averages while the S&P 400 Mid-cap, Russell 2000 and the broad VGY Value Line Index were only slightly higher compared to a month ago. Since middle of February, the upside was clearly driven by a broad-based rally in financials, helped by technology and consumer stocks. The downside was dominated by the energy and basic material sector but also a wide range of cyclical sub-sectors only showed flat performance over the last six weeks. So yes, there was some consolidation and some industry sectors even experiences the 5 to 10% correction (semiconductors - surprised?), many traders predicted.

So are we good to go? The sustainability of the upside performance so far this week remains doubtful although the question, whether it's a real rally or a fake one cannot be answered, or let's put it this way: Like with almost all other issues, there is a whole range of interpretations - something that was, is and will always be part of the whole game, only that the current environment invites interpretations to all extremes even more.

Macro-economic data favors more the "fake"-side of the rally as per today, 15 out of 17 economic statistics were reported below average expectations. Today's Durable Goods Orders came in slightly lower but underlying inventory levels obviously increased to record levels, where you have to wonder, what happens to all stockpiles if the anticipated recovery and acceleration of demand doesn't materialize. Looking at the Dallas Fed and Richmond Fed Manufacturing Indexes from March, you also wonder how the assessment of the economic situation can deteriorate so sharply from the peachy outlook in February as both indexes showed sharp drops among all categories of the survey (which proves once again that all these indexes are mostly sentiment driven and a stock-market rally or a few positive articles in the newspaper make many managers feel "better" about the current situation and future outlook than without it). Or maybe it's real? Maybe strong quarterly results from LEN mirror the real state of the housing recovery and weaker February housing data (slowing home sales and housing starts) across the board and disappointing results from KBH is the wrong place to look!

Short-term sentiment (cautious) and performance pressure clearly favor a continuation of the rally in the short-term, however without a lot of strong data to back up a continuation of the rally, a re-evaluation of the real economic situation may have already started and more economic data and the famous earnings outlook for Q2 will decide about real or fake!

Trade well.


(Marco Bonelli is the Managing Director of International for CL King & Associates in New York. The opinions expressed are his own.)