What a Week: Blinded by the Bright Side

To investors, all news is suddenly good news again.
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Hindsight being clairvoyant, it seems pretty clear now that the market's slightly negative action from Nov. 6 through Nov. 19 was a consolidation period, rather than a precursor of the rally's end. Instead, this week's solid gains left bears aghast and optimists with visions of sugarplums dancing in their portfolios.

For the week, the

Dow Jones Industrial Average

rose 2.6%, its seventh-consecutive weekly gain, while the

S&P 500

added 2.2% and the

Nasdaq Composite

jumped 4.1%. All three climbed above their Nov. 6 peaks, with the Dow and S&P approaching their August highs and the Comp establishing its best close since mid-June.

This week's technical breakouts have some observers forecasting more gains to come.

"Since the technical position ... has improved, the odds of a worthwhile extension to the post-October rally have improved considerably," Martin Pring, of Pring Research and editor of the

Weekly InterMarket Update

, commented Friday.

Pring, a veteran technician and author of

Technical Analysis Explained

, noted the

New York Stock Exchange

Composite Index "looked as if it was in the process of tracing out a small head-and-shoulders top," which is a bearish pattern. But on Thursday, the index "moved above the resistance trendline" at around 490 in conjunction with a surge in volume, a combination that is "unmistakably bullish," he wrote.

Additionally, the Amex Broker/Dealer Index established a "new recovery high" this week, while the Nasdaq 100 "continues to confirm the new highs," Pring observed. Weakness in the NDX would have put a "serious dent in the bullish case," but the index's strong performance augurs higher near-term prices, he concluded. The NDX closed at its highest level since June 18 on Thursday, and gained 5.2% for the week.

Another reason for the rally, and the expectation for more, is seasonality. Since 1950, December is the best-performing month for the S&P 500 and the second-best for the Dow, as well as the second best for the Comp, since its inception in 1971, according to

The Stock Traders Almanac.

Furthermore, November to January is the best three-month time period, historically, within the market's best six-month stretch of November to April.

December's strong historic performance stems, partially, from Wall Street's penchant to wax optimistic about the coming year. This trend has been on display lately, despite scant evidence of economic strength. This week's data were mixed, although Thursday did bring some upbeat news about minor economic reports, specifically the index of leading economic indicators, Philadelphia Fed index, and jobless claims.

On Friday, the Economic Cycle Research Institute reported its weekly U.S. leading index rose to 118.2 for the week ended Nov. 15, from 117.4 the prior week. The index's six-month moving average inched up 0.1% but is still a negative 3.4%.

Visions of year-end bonuses also contribute to December's historic strength. A lot of pink slips also are being distributed this year, amid reports brokerage firms may pay big settlements because of their abuses during the 1990s boom. Against such a backdrop, the so-called performance anxiety among fund managers -- or their fear of lagging the market -- is further fueling the rally, as

discussed previously.

Save for the most hard-core bears, most observers believe such factors can keep the market in rally mode until at least year-end, the potential for short-term pullbacks notwithstanding.

I've been so inclined for

some time now, and am starting to think about another aspect of the scenario: If stocks keep climbing, or at least don't fall much, the still-reticent retail investor ($2.2 billion came out of equity funds for the week ended Nov. 20, according to AMG Data) will soon get lured into shares once again.

That will give the advance a secondary boost, but such investors are likely to get burned again when the inevitable correction occurs, most likely by springtime. I write "inevitable" because I don't believe the secular bear market is over or that fundamentals support substantial further gains.

Indeed, the intent focus on aforementioned technical issues this week was partially the result of a far-less impressive fundamental story. In fact, much of the news flow was unabashedly negative, yet bad news was interpreted as good, or at least already factored into shares.

For example,

General Electric

(GE) - Get Report

rallied sharply Thursday despite lowering earnings expectations for 2002 and 2003; GE did increase its dividend, and the optimistic spin was that slower growth was already "priced into" the stock.

It's All Good

Such attitudes were evident again Friday, when a profit warning from

Brocade

(BRCD)

and a weak semiconductor book-to-bill report didn't dent investors' ardor for shares, and tech-related proxies actually outperformed. Brocade tumbled 27.5% on Friday but the Philadelphia Stock Exchange Semiconductor Index fell a relatively modest 0.7%. Meanwhile, the Comp rose 0.1%, refusing to give back even minimal amounts of the prior two days' big gains, while the Dow dipped 0.5% and the S&P shed 0.3%.

Earlier in the week, downbeat developments included some cautious talk about November same-store sales from

Wal-Mart

(WMT) - Get Report

on Monday and unenthusiastic comments about IT spending from

EMC

(EMC)

on Tuesday. Stock proxies ended both those sessions on a weak note, but the declines were relatively contained.

The "all news is good" theme really emerged on

Wednesday, when shares rallied strongly despite a steeper-than-expected drop in October housing starts and some downward earnings guidance from

Analog Devices

(ADI) - Get Report

, which rallied nonetheless. Traders chose to focus on the higher-building-permits aspect of the housing data, and that Analog Devices met consensus expectations for the fourth quarter and held out hope for growth in 2003.

Additionally,

Maytag

(MYG)

jumped 10% after merely reiterating guidance, and

Qwest Communications

(Q)

rallied 11% despite a Standard & Poor's debt-rating downgrade.

"The market is not looking at the quality of earnings but 'Did you beat the

consensus number or not?'" said Brett Gallagher, head of U.S. equities at Julius Baer Investment Management. "It doesn't matter if the number is largely fictitious or eight shades of pro forma," meaning it's been generated through questionable accounting.

The trend is reminiscent of 1999, Gallagher said, suggesting companies are being rewarded for reducing expectations and then, "lo and behold," besting or meeting them. "Unfortunately, that's not something we can analyze," he said. "It's rather discretionary."

As reported

here, Gallagher is one of many skeptics who are grudgingly playing along with the rally. That said, the anecdotal evidence of email suggests a lot of folks out there are fighting the advance, or at least are dismissing its sustainability.

Like it or not,

justified by valuations or not, the unmistakable message of this week is that the tide is rising.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.