Market starts its move during times of doubt.
Retail sales are out Thursday, another gauge of the economic activity to close out the first part of 2005. We saw the same store sales results last week, and they were called ‘mixed.’ As we indicated at the time, they are simply the same story post recession: discounters not doing as well, specialty okay, high end better, teens blowout. Despite being older, the data will garner some respect from investors who are, at least on the surface, wracked with doubt about the economy.
Ah doubt. After a strong 2003 and 2004, the economy slowed in Q1 2005 because of less capital investment (expected due to expiring tax incentives), continued high energy prices, and just a slow cycle in a larger up cycle. With the Fed still set upon raising rates and lowering money supply as well, this confluence of factors has muddied the economic water. Some are saying don’t invest because of this, some are saying go out and buy stocks because they are cheap. All would like to see a resolution of what the economy is going to do, but the market always moves long before there is any clear direction. It does not wait for investors to be sure. The money starts moving in, the market improves, breaks higher, and then the data starts confirming it.
The past few weeks we saw the back and forth volume fight between buyers and sellers. That was resolved with a rally day in late April. Then a follow through session. Now a lateral move that is attempting to consolidate that first move. Leaders are still performing well. The price/volume action and leaders, the nuts and bolts of the market, are still showing positive action in the midst of a great debate about stagflation, the bond market, the Fed, a housing bubble, etc. There has been no definitive breakout, but the action has improved. We will need to see that breakout, but what we see right now is setting up well despite all of the uncertainty. That is typically how the market works.
The market is no picture of strength. It is still down near the lows, still trying to pick up the pieces. We still think another test will come after this bounce attempt that is currently setting up; this lateral move may even turn into that test as in early 2003 on SP500. The action of late, however, suggests another bounce from here before that, at least to test the next serious resistance in the form of the early April highs. We could also be wrong and see the market continue higher even after hitting those levels similar to the second half of 2004.
The point is that despite what we feel, the final arbiter of all the chaos is the market itself. We can have all of the theories we want about what will or won’t happen, and we do our best to fit the pieces together in light of historical market responses because the market tends to repeat itself over and over with a few variations for some spice. When it comes down to the lick log, however, the key is what the market tells us to do. Right now it is still putting together a bounce, and we still like what we see, particularly in the stronger stocks. They will be the leaders, and that is why when they are making the moves we are moving in.
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