Stocks on Steroids: Less Bad Economic News is Tough on Grumpy Old Men

Forget about today's loss for stocks. We are in some interesting territory now. This week, the S&P 500 and the FTSE Eurofirst 300 both broke through their 200-day moving averages, which for those of you who don't get excited about Fibonacci and other fun parts of technical analysis, is the average of the past 200 days' closing prices. The indexes have stayed below their 200-day averages for the longest stretch of time since the 1930's and the last time we were actually above it, was late 2007. The fact that we are above the 200-day does not mean we are 100% out of harm's way, but it does indicate that sentiment is a-changing.

The driver of improved sentiment is less bad economic news. The most recent example was the report from the Institute for Supply Management's index of purchasing managers' sentiment. The index rose to 42.8 in May from April's 40.1, an improvement for sure, but still below the magic 50-level that delineates a contracting economy from an expanding one. Still, for the first time since November 2007, the purchasing managers said there was an increase in new orders.

The only folks who aren't happy about the less bad news are curmudgeons who are sitting on a lot of cash, present company included. We are the grumpy old men of investing, shaking our sticks and wondering why everyone is so darned happy that the economy is only losing a half million jobs a month).


We might shake our sticks wildly but so far, most of us are content to wait for more information. Yes, we know that from its all-time closing high of 1565 set on 10/9/07, the S&P 500 is down 41.3% through May 31, 2009. We also know that since that October close, the index has seen four different bull market rallies where it gained at least 15%. Could this time be the real one-the one that tells us that worst is behind us?

The answer is unclear, but I think the rally could continue a bit from here because with stocks still a full one-third below their peaks, there is an argument that there is more room on the upside. This is especially true if the aforementioned curmudgeons can no longer fight the gravitational pull of rising markets and decide to dive in. For now, I'm content in my grumpiness. Did I mention that my shoulder still hurts?