Once again, the market has reacted to the news. This time, the news is good so the market goes up …
New claims for unemployment insurance fell more than expected last week to their lowest level in two months and the U.S. trade deficit narrowed more than forecast in July as exports shot to their highest level since August 2008, painting a rosier picture for economic growth.
Of the two pieces of news above, the more important is the trade deficit narrowed. Yes, the unemployment rate needs to drop, but it won’t drop until more jobs become available, and more jobs won’t come until we are making more things to export. So, are we making more things to export, or is this latest trade number just a statistical anomaly? The answer is good news – we are making more things to export.
… sales of jetliners, industrial machinery, computers and telecommunications equipment all posted large gains.
This, my friends, should put to rest the notion of the U.S economy backing into a double-dip recession, but it won’t. More bad news will come, and the breathless media will report it emphatically, thus, reviving talk of a double-dip recession. This pattern will continue until the actual unemployment rate begins to drop. In the meantime, I suspect market sentiment will remain bearish, which, ironically, is a positive for the market, according to contrarian thinking …
You put that together with the fact sentiment among investors had turned more bearish than it has been since early 2009, you are ripe for a rally.
Personally, I lean to the contrarian thinking, and that is what I am preparing for. In fact, I have adjusted my open trades to reflect this new movement, which I believe will turn into a short-term rally. Here are some reasons why.
- PE ratios are low (fact)
- ROI on “safe” bonds are low (fact)
- Corporate bond issuance is rising fast (business raising money) (fact)
- Corporate cash is moving into restructuring (fact)
- Professional money managers will invest in Q3 and Q4 (speculation)
- Trading volume will increase (speculation)
- Retail investors will begin to come back to the market (speculation)
As always, whatever we do, it is a bet, especially in this range-bound market. The trick is to analyze the variables and make the bet when we believe the probability has moved in our favor. We will see …
Trade in the day; invest in your life …