Dhanvarsha: Dow closed slightly positive after a choppy session

Saturday, October 2, 2010

Dow closed slightly positive after a choppy session

Talk about a two-faced month. On one hand, October has a nasty reputation of delivering market crashes, like in 1929, 1987 and 2008. On the other hand, October ushers in the sweet spot of the presidential election year cycle. Gains starting in the mid-term fourth quarter (2010) lasting until the pre-election first quarter (2011) have averaged around 15% since 1950.

Since the National Bureau of Economic Research (NBER) declared the 'Great Recession' to have ended in June 2009, we'll use some of NBER's criteria to examine the market's risks and potential.

What's a Recession?

Here's how NBER defines recession: 'A recession is a period between a peak and a trough. During a recession, a significant decline in economic activity spreads across the economy and can last from a few months to more than a year.'

Aha, so economic activity is the key to declaring the onset and end of a recession. So what is the definition of economic activity? Again, this excerpt is directly from the NBER website:

'The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve's index of industrial production.'

Recession Over - Really?

Ok, so let's look at a few of the indictors NBER uses to determine economic activity:

Unemployment: In June 2009, 16.5% of American were jobless. In August 2010, 16.7% of Americans were jobless. If the candor of those numbers surprises you, it's based on the U-6 figures published by the Bureau of Labor Statistics. Even the more commonly known U-3 number increased from 9.5% in June 2009 to 9.6% in August 2010.

Real income: According to a new study released by the Census Bureau, 1 in 7 Americans lives in poverty. The overall poverty rate climbed to 14.3% or 43.6 million people, the highest since the 1960s. The poverty level for 2009 was set at $21,954 for a family of four. Imagine what the poverty rate would be if these households weren't receiving continually extended unemployment checks.

GDP: Just a few weeks ago, the government revised - in this context revised means lowered - the GDP numbers for 2007, 2008 and 2009. GDP for 2007 was revised down from 2.5% growth to 2.3%. The 2008 decrease was lowered from 1.9% to 2.8% and 2009 growth was revised up from a 0.1% to a 0.2% increase.

If you feel that a 0.2% year-over-year 'bounce' in GDP is enough to usher in a new bull market, a revisit in economics 101 is advised.

The chart below plots the S&P 500 against various economic indicators. The grey line marks the post-June 2009 recession period.

Dare to be Different

For obvious reasons, the government and Wall Street would like us to believe that the stock market rally is a reflection of an economy gathering steam. Even most of the media is convinced that's the case and we are encouraged not to doubt them.

So, dare we consider facts and developments that might derail this post-recession bull market? Yes, even at the risk of being considered party poopers, dare we do!

Change of Perception

Perception is probably the most persuasive and least reliable force to influence our decisions. Like a caterpillar, perception morphs from its humble beginning as a disrespected and misunderstood line of reasoning to a popular and crowd-pleasing mass movement.

For example, the March 2, 2009 buy alert by the ETF Profit Strategy Newsletter was met with mockery and disbelief. A year later, this once scorned idea had morphed into a movement with mass appeal.

By April 2010, there was no question that the bull market was over. In fact, by many measures, investors were more optimistic about American's future prospects than in the year 2000 or 2007.

Two weeks before the April 2010 high watermark was reached, the ETF Profit Strategy Newsletter warned: 'The message conveyed by the composite bullishness is unmistakable bearish.' Since the May 6 'Flash Crash' we've been caught up in a roller coaster of emotions as the market zigzagged from support to resistance.

The final jury is still out on what's next, but we know that perception can change at a whim. Don't misinterpret the current bullishness as a reliable buy signal.

http://finance.yahoo.com/news/Could-October-Topple-The-New-etfguide-3979777766.html?x=0&.v=1
Dow closed slightly positive after a choppy session