Tidbits from Oct 5

The US stock market rallied hard at the end of the session.  Is this real?  I don't think we will see a "real" bull market rally until there is better evidence that the US will avoid a recession.  Otherwise, it has the feel of short covering at the bottom end of the trading range (around 1100 on the S&P), and now a rise up towards the top of the trading range.  BUT,  the ADP report today, and the DOL jobs report on Friday,  could be market moving.  I think the recession talk has been overdone, so I expect a bounce off this data.  Starting next week, we will begin to see earnings reports for Q3 and, more important management guidance for Q4.  Again, my expectation is that these will be mildly positive and will spur a short term rally.  One key to watch is whether there is a breakout above 11,500 on the Dow (1200 on the S&P), and a breakdown in correlation of stocks.

There has been unusual correlation of individual stocks to the movement in the market averages.  Normally, it is a market of stocks not a stock market, but since August, most stocks seem to rise and fall based on the movement of the indices rather than fundamentals affecting the particular stock.  This seemed to break down a little in the last 10 days, which is a positive sign for bullish investors.

Update on Europe--The equity markets have been spooked for months on the prospects that there could be another "Lehman" with a large financial institution going bankrupt.  As I pointed out previously, this is just not going to be allowed to happen in Europe for many reasons.  Yesterday, this view was confirmed as the French and Belgian governments announced a plan to rescue Dexia, guaranty its deposits, and its funding.  (sound familiar?)  Furthermore, there is discussion in Europe today of a "recapitalization" plan for European banks.  I have advocated for some time that the first step ought to be a serious stress test followed promptly by a TARP like capitalization plan.  This would quiet the speculation about the future of Euro banks, and put them in a stronger position to deal with troubled sovereign debt write-downs.  But instead of acting definitively early on, the Euro governments have vacillated and taken half measures hoping to avoid a more far-reaching restructuring.  Ultimately, they will be dragged to the logical conclusion.  But this will put more pressure on sovereign debt across Europe (like in Ireland) and force the ECB into a more accommodating stance  which will reduce the value of the Euro v. the US$

  Its a case of pay now or pay later.  usually pay now is cheaper.