Kass: The Case for a Summer Snooze Fest

Just as I wrote that it was wrong to buy following the strength of three weeks ago, I believe it to be wrong to sell the recent weakness as I see emerging value developing in a growing set of stocks. Most technicians, following the recent drop, have turned more bearish, and I suspect that the sentiment surveys and short interest will follow the technicians. As well, we are quickly moving into oversold territory. All of these factors can be interpreted as contrarian and as more positive signals.

However, as I mentioned to Sir Larry Kudlow a month ago, just as there is limited causality between advancing stock prices and an improving economy, a declining stock market does not necessarily suggest an immediate deterioration or disappointment in economic activity.

Indeed, despite the disappointing jobs report last week, which appears to be the proximate cause for July's market drubbing, I see light at the end of the economic tunnel.

I still see a production boom caused by the replenishment of inventories (from a very low base).

I still see stabilization in residential real estate as affordability records multi-decade highs and as the relationship between home ownership grows substantially more compelling than renting.

I still see the domestic economy in (but shortly moving out of) the final phase of deteriorating unemployment reports as the massive fiscal and monetary stimulation plans begin to take hold in the last half of 2009.

And, as reflected in my previous writings (see below), I still believe the odds favor my scenario of a sideways correction following the recent overbought drop, which lays the groundwork for another tradeable (but final) leg higher.