the often misused term "overbought" being thrown around regularly
on Wall Street these days, it is a good time to take a step back and assess
the odds of a new bear market rearing its ugly head from current conditions.
on Wall Street make decisions based on economic fundamentals; some use
technicals, and others use both. In terms of helping discern between
favorable market conditions and unfavorable market conditions, fundamentals
and technicals are both important. Bull markets tend to have favorable
fundamentals and technicals backing them. Bear markets almost always are
associated with weak or negative economic growth and corresponding weakness
in the technical state of the markets.
fundamental perspective, experienced investors know the periods shown below
were less than friendly in terms of returns. Stocks tumbled in July of 1990.
Bear markets were wrapped around economic weakness in 2001, 2008, and 2009.
have fundamental conditions in place to suggest a major stock market top is
around the corner? Said another way, is there a realistic chance of negative
GDP growth occurring in the next several quarters? The Wall Street Journal's
annual survey of the best economic forecasters produced favorable responses
on the economy's prospects in 2011. Similar upbeat results are contained in
the latest Blue Chip Economic Indicators survey. The consensus in both
surveys is that the economy will grow by at least 3% this year; hardly what
we would expect to usher in a new bear market. We do respect (a) forecasting
is difficult, and (b) things can change over the next few months, but for now
the fundamental outlook remains bullish.
the Obama Administration looking to increase exports, the recent acceleration
in manufacturing activity was encouraging. In the latest ISM survey, the PMI
composite index rose 2.3 points to 60.8, the highest level since May 2008.
Economists expected a slight decline to 58.0. A 5.8-point jump in new orders
to 67.8 represents the best level in seven years. Employment increased 2.8
points to 61.7, the highest reading since the spring of 1973.
data also points to more responsible lending practices in the housing market.
According to Freddie Mac, cash-in deals rose 11 points to 46% of all
refinancings in Q4, the highest share since data began in 1985. Cash-out
deals fell to a record low 16% of refinancings.
hints of an improving labor market have surfaced in 2011 as well. Online
help-wanted postings jumped a record 11.4% in January 2011, representing the
best level since the summer of 2007. New help-wanted postings jumped 16.1%
(best since July 2008). Historically, these figures align well with
employment gains in the coming months.