Market Commentary for the week of April 20, 2009

Bottom fishing.
Lest the markets stampede forward without them, value hunters and traders seem bound and determined to lay their bets now on equities with poor momentum, but dirt-cheap prices. What does it matter if they surrender current performance for future upside explosiveness?

I have previously suggested that we are in an ideal time to make reassessments about owning equities, but I more often reference upside earnings momentum and current price performance than “undervalued” laggards. After all, they must be languishing for a reason.

Nevertheless, for some stalwarts, these are ideal times. The starting line is equal for all stocks.

I wouldn’t call the market’s recent rally attempts “garage sales,” but the fervor and elbow-flying deal-making looks something akin to a Christian Dior trunk sale on Fifth Avenue. Those companies whose limitations were abundantly clear just months ago now look like diamonds (or gowns, to modify my earlier metaphor) in the rough. Forget the balance sheet, sector, geography, or management. Cheap is cheap, right?

Not so fast.

Timing is more critical.
Perhaps it is our inbred optimism that convinces us the worst is over. “What’s a loss of a few million on the balance sheet,” the value hunters say. Those who “shorted” the market in March are buying today.

Like you, I want to believe that the fiscal stimuli will work. I want to see the impediments to earnings growth diminish. But I also want to experience the redefinition of moral leadership at the corporate level. Until consumer confidence is restored, market machinations are simply a landscape for the game-players. Investing in the long-term is something different, altogether.

To be sure, the absence of any near-term calamity and the cessation of significant downside momentum is a positive for the market. Price signals, however, are not always the same as momentum, or trend, signals, and should not be confused with them, either. The cycle bear is nearing maturation. How soon one wishes to place their bets is determined either by folly and impatience or one’s methodology. I am emboldened that there is a gathering of stocks and sectors near the bottom, but wary about the timing, or magnitude, of any current sustainable rally. Last week’s economic news (unemployment, foreclosures, deflation) leave little to be desired, and offer no indication of an imminent turnaround.

Look, I’m not nitpicking about the demise of the bear. But I am trying to be methodologically prudent about protecting client portfolios from excessively unwarranted speculation or capital losses.

However…
Two factors that have me interested right now are the increasingly rising “relative strength” quotients (RSI), a measure of cycle velocity, and the “higher lows” that some stocks are making during their short-cycle upswings. If these trends persist, we might look back upon Q1 as the “beginning of the beginning.” But, noting that trends are timelines of significant duration, I must see confirmation of the existence of a redirection from bear-to-bull, not simply a trader’s short-term value advance.

Current advances in Technology, Biotech, Utilities (yield), and Basic Materials are positive statements, but indicate that the consumer still is not the engine of the economy’s renaissance. While diversification and momentum are key to portfolio performance, the consumer is the key to the economy turning around and maintaining (and offering) the potential for capital gains.