- The Washington Times - Friday, March 13, 2009

Wow, what a difference a week can make in the stock market. Last week the market as measured by the S&P 500 fell 7 percent, only to rebound 4.7 percent so far this week. Now before we go and get all excited about the past few days, let’s remember that the S&P 500 is still down 20 percent on a year-to-date basis and 44 percent compared with where it was this time last year.

Based on conversations I have had with both professional investors and those who keep tabs on the market, I can say there are a few questions that people are asking. Is this positive move sustainable? Is this the bottom? What should I be doing in the market here?

These are good questions and time will tell, but in my view the recent move seems to be more of a “dead cat bounce” in general. For those who have never heard of this term, it means that Tuesday’s positive move in the market could be a temporary recovery following a rapid recent decline, even though longer-term prospects call for further decline.

Now I’m not trying to be Debbie Downer here and rain on the recent positive move, but we have seen similar recent moves in the market in the past few weeks that in hindsight were more blips than moves. Over the Jan. 20-28 period, the S&P 500 moved up 8.6 percent; from Feb. 4 to Feb. 9 up 4.6 percent; and on Feb. 23 that index rose 4 percent. What all of these had in common is the lack of sustainability, which I attribute at least some if not all to the rash of negative data points that hit the market after each of those upward moves.

In my view the number of data points this past week was rather light and more loaded in the back of the week with retail sales data and initial jobless claims hitting the market on Thursday. Jobless claims for the week continue the trend of recent weeks and the headline for retail sales was better than expected. Digging below that retail sales headline, however, reveals that some of the drivers for the better-than-expected performance was due to gasoline sales as well as general merchandise and miscellaneous sales.

Higher gasoline sales reflect rising pump prices over the past several weeks from a low near $1.60 per gallon to the $1.94 average across the U.S. per the Energy Information Administration. Rising fuel prices and continued jobless claims are not anything to get excited about, in my opinion, as they likely lead to lower consumer spending in the coming weeks and months. On the other hand, seeing an upward trend in general merchandise and miscellaneous sales bodes well for what I talked about last week, which was pantry and home restocking. With that in mind, I continue to like PepsiCo and Procter & Gamble.

Looking ahead to next week, there will be a flood of data, and in my view that will determine whether the week we are wrapping up is a repeat of those prior upward blips or something more sustainable.

Briefing.com’s economic calendar shows 16 different data releases next week, with all of them falling between Monday and Thursday. Key data will be coming for the manufacturing economy, as measured by industrial production and capacity utilization, housing industry and price data that will speak to inflation or deflation for consumers and producers. Bookending these will be two sentiment indicators, the Empire State Manufacturing Survey, which gives an indication of manufacturing activity in the state of New York, and the Philadelphia Federal Index, which measures changes in business growth in that region.

Over the past few weeks, I have either visited or spoken with a host of companies from beverage and snacks to those that serve the industrial manufacturing world to Internet service companies and more. All in all, these companies and their respective management teams remain less than enthused about the current quarter and are for the most part far more optimistic about the second half of 2009 than the first half.

This leaves me concerned about the news we will hear in a month or so when companies begin reporting March quarter results. Based on the data in hand and anecdotal information collected from company meetings and conversations as well as other observations, the question I am pondering is the following: Are expectations for S&P operating earnings per Thomson One to be up 10 percent in the second half of the year compared with the first half aggressive? Keep in mind that these expectations have already started to trend down in recent weeks.

So is the market at a bottom?

Let’s keep our eyes peeled for more data in the coming days and weeks that help paint a better picture of where we are and what we should be expecting.

One last point, if the stock market has bottomed, it does not necessarily mean that we should expect a sustained positive move just yet.

Chris Versace is the founder and portfolio manager of SlipStream Capital Management LLC based in Reston. Mr. Versace was an equity analyst for more than 15 years at Salomon Brothers, Donaldson, Lufkin & Jenrette and most recently Friedman, Billings and Ramsey. Mr. Versace can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in the companies mentioned in his column, although positions may change at any time.

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