Tuesday, 7 August 2007

US stocks rebound strongly

MarketWatch reports yesterday's market action.

Stocks rallied to a sharply higher close Monday, sending the Dow industrials up by over 280 points for its best day since 2003, as investors snapped up financial shares, which have been heavily hit in recent weeks amid concerns about credit markets and bad home loans...

Crude oil futures came under severe pressure, with the front-month crude contract falling $3.42, or nearly 5%, to close at $72.06 a barrel. Traders are worried that a slowing U.S. economy will result in lower energy demand. See Futures Movers

The front-month gold contract also fell, losing $1.10 to $683.30 an ounce. See Metals Stocks.

Treasurys fell as investors removed safe haven positions amid the rally in stocks. The benchmark 10-year Treasury finished off 11/32 at 98-7/32 with a yield of 4.729%. See Bonds.

There were no new economic data from the US yesterday, but elsewhere the data were positive.

In Japan, the leading index rose to 80 percent in June, the first time it has been at or over 50 since October.

In Germany, manufacturing orders unexpectedly rose 4.6 percent from May, the biggest gain since December 2004.

In the UK, manufacturing output rose by 0.2 percent in June while industrial output as a whole rose 0.1 percent. In fact, the UK economy as a whole has done well recently, growing 0.8 percent in the three months ending July according to the National Institute of Economic and Social Research, but retail sales were weak in July.

While the rest of the global economy is looking good and even in the US, consumer confidence hit a 6-year high in July, John Hussman reminds us that economic optimism is a contrary indicator.

Unfortunately, if you examine the data, you'll quickly discover that consumer confidence is a lagging indicator, well explained by past movements in GDP, employment, and capacity utilization. Worse, for the stock market, it's a contrary indicator.

Hussman also warns us about looking for greater public participation to mark a top in the market.

Finally, while bullish sentiment on Wall Street has been extremely high for months, I doubt that this cycle will end with the same "public" frenzy for stocks as we saw in the late 1990's. The speculation of the public in this cycle has been largely tapped out on real estate - including heavy mortgage equity withdrawals...

To which I would add that the late 1990s remains fresh in the public mind. Investors seldom make the same mistake in consecutive cycles.

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