Without Conviction

I mentioned that last week's divergent development may represent a positive tone for stocks, which by chance, played out. Stocks surged on Tuesday and held higher ground for the balance of the week. Some stock investors appear to believe the worst of the credit mess is behind us and any U.S. recession will be mild.

World Market Summary

U.S. stocks turned in a good performance for the week with the S&P 500 delivering a 4.2% gain. The NASDAQ 100 was the big winner for broad indexes, up 5.56%. REITs also performed well adding 6.99%. Emerging country stocks added 5.37% and international developed country stocks were up 4.41%.

Top sectors included current leaders Metals & Mining and Steel. Home builders also topped the list up 57% (that not a typo, check out ITB) since early January 2008 but is still down 50% from January 2007 highs. International sectors were led by finance, up 6.82% and materials, up 5.67%.

Asian and Latin America countries continue to represent the top performing emerging markets and Australia followed by Italy and U.K. topped developed countries.

Price action for stocks was constructive during the week. Stock leadership broaden and more successful breakouts materialized, both positive developments. However, volume has been lighter than average over the last two weeks. By comparison, the early 2003 market recovery shows a much higher level of market activity. The market is trying to tell us we have heard the worst from big banks and any U.S. recession will be shallow; but not convincingly.

World Economy Summary

U.S. manufacturing continues to be weak, unemployment is up, and retail sales are down. We are hearing more frequently from international monetary authorities regarding their concerns about inflation. Big banks continue to work through credit related issues and Lehman Brothers did successfully raised $4 billion in new capital but the TED SPREAD (3-month T-Bill – LIBOR) only narrowed a bit during the week as banks continue to be hold their cash.

Is The Worst Over?

During the next couple of weeks we are going to have a much better picture of how the current credit conditions, slowing economy, and rising commodity prices are impacting corporate earnings. Earnings season officially kicks off today and by the end of next week a good portion of the warnings should be issued. By some P/E estimates stocks are no bargain, even at current prices.

By most accounts we can expect more large credit-write downs from banks in the coming quarters.

It is entirely possible the worst of the market decline is behind us but mini-rallies in correcting markets are part of the process.