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Being Street Smart 11/12/4


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#1 TTHQ Staff

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Posted 12 November 2004 - 04:04 PM

BEING STREET SMART
____________________

Sy Harding

A WINDOW OF OPPORTUNITY? November 12, 2004.

Isn’t it strange how year after year surrounding conditions are increasingly gloomy as the stock market’s favorable season (November to May) approaches. And then how those gloomy conditions usually seem to improve once a stock market rally begins. Here’s a philosophical question for you. Do the conditions actually improve, or is it the attitude and perception of them that improves, as new money flows into the market in the fall and launches a stock market rally, making investors look more at the positives, less at the negatives?

The Dow made a new low for the year at 9,749 on October 25, down 7% for the year. It has gained 7.5% in the three weeks since. The S&P 500, which was down 2% for the year on October 25, has also rallied 7.5% since.

Was the market seeing through the worries that were present in October, to a period when the worries would be less foreboding? Or did the chunks of extra money that investors and the market begin to receive in the fall (from mutual fund distributions, etc.), which create the market’s favorable season, simply overwhelm the worries?

The latter certainly has to receive a good measure of the credit, since the market’s seasonal pattern over the last fifty years, of making most of its gains in its favorable seasons, has been so persistent. However, it’s also true that a number of the market’s previous concerns have been alleviated.

The Presidential election ended without the deadlock and legal contortions that were feared in October. The employment picture that had been so bleak all summer took a turn for the better with the report a week ago that twice as many new jobs were created in October as economists had forecast. Retail sales, which had begun to soften, and auto sales that had plunged during the summer, rebounded nicely according to the most recent reports. That relieved some of the worry that rising interest rates and rising gasoline prices would force consumers to put a clamp on their wallets.

This week the University of Michigan’s closely watched Consumer Sentiment Index, which had been plunging month after month, reversed to the upside. It improved to 95.5, the Index’s highest reading in three months, from October’s level of 91.7.

The U.S. dollar continued to decline, in fact to a new multi-year low. But the upside of that is that it makes exports less costly for foreign consumers and imports more expensive for U.S. consumers. At some point that should begin to reverse the record U.S. trade deficit with the rest of the world. And it was reported on Tuesday that the U.S. trade deficit declined from $53.5 billion in September to $51.6 billion in October. Not a big deal. $51.7 billion would have been a record deficit just a couple of months ago. But at least it’s a step in the right direction.

Crude oil prices, which have been surging all year and reached a record high just a couple of weeks ago, have pulled back from that high over the last two weeks, from $56 a barrel to $47. That also is not a big deal. The market began worrying about what the high price of oil might do to the economy and corporate earnings a number of months back, when the price of oil moved above $35. So hovering around $47, oil is still a potential big problem going forward. But the perception of risk has changed with the decline from $56. Last but not least, fear of a second terrorist attack on U.S. soil, which had seemingly been overdue for three years, has lessened considerably since the safe passage of the anniversaries and events of the summer and fall that were thought to carry the greatest risk.

However, a spike-up rally of 7.5% in three weeks, which is an annualized rate of 130%, is probably too much too soon. I suspect the market is going to have to drift sideways for awhile, or perhaps pull back some on short-term profit-taking, before it makes much further upside. Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.