Prescience Takes A Backseat To Upcoming
Summer Doldrums

By Brady Willett
This Week
Thanks to strong demand from autos and planes April durable orders are expected to show a sharp rise after contracting by 0.5% in March. Moreover, it is expected that 1Q02 Preliminary GDP results will be ratcheted higher than initially reported (from 5.8% to 6+%), and that April new home sales will remain strong.

Accordingly, and keeping in mind last weeks better than expected retail sales and Mich. Confidence reports, this weeks batch of economic news should continue to promote the 'recovery' theme.

That said, even as the U.S. economy continues to show improvement it would be remiss not to reiterate the primary reason behind this strength: the continuance of strong consumer spending. As such, the simplistic loveliness of the phrase 'Beaten Down U.S. Economy is Turning Around' may be becoming redundant. After all, the components of the U.S. economy that have been 'beaten down' are not yet on sure footing. Rather, pockets of strength (consumer, government spending) have instilled a hope that a broader rebound will develop.

Just as the U.S. stock markets remain volatile because of the hazy outlook for corporate profits, so too should the outlook for U.S. economy remain volatile because the U.S. consumer is heavily indebted. Yes, this is a rehash of the old 'the consumer is not saving so things could get ugly' routine. Nevertheless, worries of expanding consumer debt should not vanish simply because people continue to force-feed themselves cheap Wal-Mart products using plastic. Rather, they should intensify.

Such is why the 'recovery theme' has a tragic flaw - if economists expect consumers to take some time to 'recover' from their decade long buying binge this would mean that the economic situation is about to deteriorate. Likewise, if businesses expect the consumer to take some time to 'recover' capital spending may not post a sustainable rebound anytime soon.

In sum, some companies are regaining pricing power and economists are starting to chant that "The recovery dynamic has started" . Is there now a consensus that "consumer debt thresholds have reached a permanently high plateau"?

Stock Markets
The current bear market rally may not go the way of previous bear market rallies. Meaning that high valuations and less euphoric money flows into stocks should keep the markets from breaking above their current trading range while the rejuvenated interest in 'the recovery' should keep prices from quickly collapsing lower. To note: I borrowed this type of analysis from a Reuters story line - it is the vague way of stating that the markets are entering the summer doldrums and not much should happen until August/September and/or that stock prices could do pretty much anything but will do it inside of a predetermined trading range.

Trading Ranges & Related Technicals
Saying that the markets are hemmed inside of a predictable 'trading range' seems to be the course de jour this year. Moreover, arguing that the markets absorb information in a rationale manner, despite the popularity of junk rated stocks, seems to also be en vogue.

Think about it this way: the day after Cisco report earnings the Nasdaq rallied by 7.8%. What was more important - Cisco's pro forma earnings numbers and a vague CEO statement or the stock market rally that followed???

Point being, when you need to look at reaction in the stock markets to figure out whether or not 'news' is 'good' or 'bad' you are, in fact, concluding that the stock markets absorb information in an rationale manner. Likewise, if you need to look at how the markets react to broken trading ranges you are also concluding that money in the markets is trading around these trading ranges in a rationale manner.

What if after an earnings release a companies stock price shoots up 20%, then following an analyst 'buy' reiteration it breaks above its 200 day moving average, then following a Maria mention it breaks above its treadline… well, supposedly this would mean that its share price is set to rally even higher?…

Such is why I have an aversion to discussing TA and trading ranges: stocks prices do no act rationally - they are only a reliable indicator of investor schizophrenia. With this in mind, the 'bottoms' and 'tops' act as the ceiling and the floor inside of the padded room, and only when the patient jumps through the window do things get interesting.

Many people in tune with the markets do not see things getting interesting for some time, and just as I might read my horoscope with some degree of interest I am inclined to agree with this type of analysis.

'Fisher' Syndrome?

Moments before the stock market crash of 1929 Yale economist Irving 'Fisher' made a bold claim:

"Stock prices have reached what looks like a permanently high plateau."

Last week fund manager Ken Fisher, who in early 2000 took a bearish view on the markets and adopted a 0% equity weighting, made a bold claim:

"100% Stocks"

Prescient Bear Ken Fisher Says It's Time to Buy


Brady Willett
BWillett@fallstreet.com
www.wallstreetwishlist.com

May 22, 2002