A late week rally which saw the Dow Jones Industrial Average gain 564 points in two days snapped a six-week losing streak. After setting five-year lows on Wednesday, the Dow and NASDAQ surged on Thursday and Friday wiping out all of the losses recorded during the previous two weeks. For the week the Dow gained 322 points (+4.3%) and ended the volatile period at 7850. The NASDAQ also finished in the plus column as it added 71 points (+6.2%) and settled at 1210.
As of the close on Wednesday the Dow was down 38% from the record of 11,722.98 set more than two years ago. This decline makes this the worst bear market for the Dow since 1974 when the index loss 45%. The NASDAQ, which closed at 1,114.11 on Wednesday, has dropped 78% from its record close, the biggest decline by any major index since the 1930s.
Investors were shouting Yahoo! after they surprised on the upside, posting solid revenue and earnings growth for its third quarter. Other upside earnings surprises, from the likes of Aetna and Lexmark, helped trigger a resounding rally Thursday, although the surge northward was at least as much a matter of relieving a severe oversold condition.
The strong trading sessions, naturally, merely inspired more bear growls in the trading pits. Sharp brief rallies, in which shorts scramble out of the way, have been followed this year by multiple sessions of downward drizzle, leaving the indexes once again at new lows. The inclination to sell rallies is as strong now as the tendency to buy dips was in early and even late 2000. But if this rally was built on improved earnings, as it at least partly was, investors could finally be in a position to feel better about the economy and its constituent companies.
THE COMPASS PORTFOLIOS
Several downgrades have significantly reduced model positions during the past two weeks. The downgrades come at a time when the markets have retested their July lows, and held. This retest is looked on by market analysts as a positive sign, since the bottom has held not once, but twice. We have acted on the downgrade with the discipline that has served us well; however, if we are truly in a trading range (as the past three months seem to indicate), the top has to be identified as Dow 9000, a far cry from our current level. If the trading range holds, positions will need to be restored to participate in the upward move to the top of the trading range. We will monitor the markets closely, and take proactive steps if necessary.
Despite contraction in the economy, data still supports modest growth. Retail Sales for the month of September were down -1.2 percent, matching Dow Jones Newswires’ forecast. August was revised to +0.6 percent from +0.8 percent with July moved up to +1.2 percent from +1.1 percent. While some slowing occurred in the overall economy unrelated to weather, September’s contraction was expected on the heels of strong, above-trend growth in June, July and August. Fundamentals support a return to positive retail sales in the months ahead. This is consistent with an economy that is still expanding, albeit at a much slower pace than expected.
The continued refinancing wave of home mortgages is likely to underpin future growth. From the Mortgage Bankers Association, the index measuring applications for mortgage refinances was at a record level for the week ending October 4th. The index is up 3.8 percent over the previous week, 41.8 percent from the level made four weeks ago and 471 percent since April 5. The number of applications in the pipeline right now is probably enough to fortify consumer spending for several weeks ahead as these refinances result in cash-outs for home improvements, other purchases; and for those that lowered their payment directly or by consolidating debt, they obviously opened up more buying power!
So lets give the consumer credit! They know a good deal when they see one. The attractive incentives to buy autos pushed sales up to a rate that most economists knew was not sustainable. Vehicle sales exceeded expectations with 18.1 million units (seasonally adjusted annual rate) sold in July and topped forecasts again with 18.7 million units in August. September’s sales came down to a more reasonable pace at 16.3 million units. To no surprise, other retail businesses suffered during this time. Consumers only have so much to spend. Going forward, particularly with the holidays approaching and the weather changing, the previous laggards could be winners in the months ahead.