The Glass Is Half-Full but the Street Is Hesitant to Drink

SAN FRANCISCO -- There's something happening here. What it is ain't exactly clear ... but despite (or because of?) persistent protestations, the market is starting to look like Jack Nicholson on that wall: Deep down in places it doesn't talk about at parties, it wants to go higher, it needs to go higher.

Higher still is where the market went today, as the Dow Jones Industrial Average rose 2.7%, the S&P 500 2.6% and the Nasdaq Composite climbed 2.8%.

The catalyst for today's rise was a stronger-than-expected report on consumer confidence in March. Even more notable than confidence actually rising was the fact that market participants chose to focus on the data, rather than the fact it might cause the Federal Reserve to ease less aggressively going forward.

Perhaps investors presumed the Fed will ease anyway, but the point is Wall Street chose to accentuate the positive. That's a notable change from just a week ago and suggests, perhaps, that a change in trend has occurred.

But as suggested above, Wall Street remains paved in a thick layer of skepticism.

Recent action is "encouraging, but we were down six weeks in a row. Let's not make too big a deal out of it," said John Roque, senior analyst at Arnhold and S. Bleichroeder and a RealMoney.com contributor. "You can't place much emphasis on goings-on of any one day -- or two or three days."

Given that the Dow fell more than 1,700 points from its intraday high on March 8 to its intraday low on March 21, and the Nasdaq remains more than 60% off its peak, "we'd better rally some time," he added.

Similarly, Scott Bleier, chief investment strategist at Prime Charter, said "there is no magic bottom," and noted if capitulation occurred earlier this month "it was not the traditional capitulation people were looking for."

Most individual investors who sold last week were "forced out" because of margin calls, he suggested. But the majority seem, so far, compelled to "hold until zero because they're long-term investors." The somewhat sarcastic implication being that we've yet to reached a point where individuals have gotten really scared about owning stocks.

As noted previously, capitulation can come in many flavors. But there is still a feeling among many Wall Street participants that you "need" to have a real panic selloff in which investors flee the market en masse before a final bottom can be established.

The irony of Bleier's cynicism about the rally is that last Wednesday he declared to Prime Charter's brokers that, generally speaking, the "rewards outweigh the risks," at least short term.

Forget the wall of worry. How about a wall of disbelief?

But I'm not saying buy with impunity, or that it's late 1998 again. Risks clearly remain, evidenced again by news after the bell tonight from Palm (PALM Quote - Cramer on PALM - Stock Picks) and Nortel Networks (NT Quote - Cramer on NT - Stock Picks), as well as the confusion regarding the timing of Micron Technology's (MU Quote - Cramer on MU - Stock Picks) earnings, now scheduled for March 29, according to the firm's Web site.

On the macro front, there's the issue of the European Central Bank meeting Thursday, and ongoing developments in Japan. Plus, fourth-quarter GDP figures Thursday, and a full slate of economic data Friday, including the University of Michigan consumer confidence survey.

Then there's the Agere IPO, priced tonight at $6. As discussed in the RealMoney.com Columnist Conversation, I think the fact the deal was priced -- regardless that it was at the bottom end of an already halved range -- signifies a relative level of health in the marketplace that many still refuse to consider; maybe not robust health, but it's far from Armageddon.

Then again, there's still the prickly issue of how Agere fares tomorrow.

Alphabet Soup

Bottom line, it's far more likely both the economy and market produce W-shaped recoveries vs. the much hoped for V, much resigned to U, or much dreaded L.

Speaking of such things, David Orr, chief capital markets economist at First Union in Charlotte, N.C., suggested the economy is most likely to make a "saucer-shaped pattern" that approaches but ultimately escapes recession.

"Our forecast is for 40% chance of recession but we are not in recession now," Orr declared.

"Taken at face value, the near-term implication [of the consumer confidence report] is less pressure for aggressive Fed easing," the economist said, noting the bond market's response to the data. The benchmark 10-year Treasury note fell 1 2/32 to 99 30/32 today, its yield rising to 5.005%. "At face value, you'd think consumer confidence is rebounding and the Fed has said that's one of the major criteria" it's looking at to determine monetary policy.

As you might have guessed from those two "face value" comments, Orr is dubious, and believes the fed funds rate eventually will be brought down to 4% or 4.25% from its current 5%.

"There's less [to the data] than meets the eye," he said, noting the expectations component of the Consumer Confidence Index rose to 83.6 from 70.7, a far sharper rise than the so-called present situation index, which rose to 167.2 from 167.1.

As with the argument that the fall in the expectations portion of the index early this year/late 2000 exaggerated the overall drop in consumer confidence, Orr said the recent rise suggests the uptick will prove fleeting.

Having said all that, Orr said the real key going forward is not consumer confidence, but CEOs' confidence, "because they make the decisions that ultimately effect consumer confidence."

The Conference Board measures CEO confidence on a quarterly basis; the first-quarter survey is expected in late April.

If a recession does unfold, it will be because of a slowdown in capital spending, not consumer spending, Orr said. The recent spending spree and subsequent inventory buildup has left much of corporate America in a situation similar to the one faced by the energy sector in the early 1980s and commercial real estate in the late 1980s, he said.

"It takes time to grow into the capacity, and I think the capital spending/capacity issue argues for a longer workout if not a recession," Orr concluded.

The payoff of all this is he believes the market could have an "interim rally" on expectations for a second-half recovery, but that's there's more danger of a another economic setback than many believe because of the capital spending issue.

Again, as tempting as it may be to accentuate the positives now, don't lose sight of the potential negatives, which are myriad.