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Recovery or Bear Market Rally?

By: Charles Rotblut CFA

The stock market is acting as if a bottom has been set.

There are reasons to be optimistic. Oil has fallen by more than 20% since early July. The Fed is clearly on hold for a while. Pending home sales unexpectedly rose in June. Even the greenback is doing better.

Unfortunately, bear market rallies can feel a lot like recoveries. Stocks were oversold on a technical basis, so some type of an upward move was expected. Furthermore, the markets did try to make a recovery in response to first-quarter earnings, only to reach new lows instead.

The financial mess continues. An article in Sunday's Chicago Tribune discussed how lenders are reluctant to rework mortgages unless borrowers fall behind in their payments. Other data suggests that a sizeable number of homeowners with reworked loans are still unable to meet their payment obligations.

Still, stocks have a long history of climbing the proverbial wall of worry.

Could this be another chapter in that story of bulls trampling bears? A case could be made for this scenario, but the reality is that we won't know until after the fact. Nonetheless, when the market does make a successful recovery, there won't be much foreshadowing, so it makes sense to maintain an allocation to stocks.

Market Overview

This week, I'm going to do something a little different and display multiple charts to give you an overview of what is happening in the broad financial markets.

In my last article, I discussed how the S&P 500 was trading in a new, lower trading range. The index is attempting to move out of this range, though it is has yet to truly rise above the line of resistance.
Part of the reason for the rebound in stock prices is the drop in crude prices. As I stated above, crude has dropped by more than 20% since early July.

Keep in mind, however, that Texas has already been hit by one hurricane and one tropical storm this summer. Hurricane season lasts through October.

Gold has also fallen notably within recent weeks. Combined with the pullback in crude, this suggests a rotation out of commodities. A reduction in fear and a stronger greenback is likely playing a role, as well.

The VIX has fallen notably over the past four weeks, a sign of reduced fear in the markets. At current levels, the index is within its historical norms.

Treasuries are below the price levels reached in the spring and have been holding a relatively tight trading range throughout the summer. The general consensus that the next move by the Fed will be to raise rates is likely creating a ceiling for bond prices.

Relatively speaking, American large-cap stocks are faring much better than their international counterparts. The MSCI EAFE Index, which includes stocks from Europe, Australia and the Far East, was hit hard in the spring and remains well below stiff resistance.

Article Source: http://add-articles.com

Charles Rotblut is the Vice President of Web Content for Zacks Investment Research and the Senior Market Analyst for Zacks.com. He oversees the editorial staff, manages the market-beating Focus List, Timely Buys and Top 10 portfolios, and plays an instrumental role in the development of new products. For more information, visit www.zacks.com/commentary/8276/Recovery+or+Bear+Market+Rally%3F+827600

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