VERSACE: Odds are market will continue to be choppy

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ANALYSIS/OPINION:

Earlier this week the Dow Jones Industrial Average had its best day thus far in 2011 and when I appeared on America’s Radio News, one of the hosts remarked that “it was a great day in the market.” While that was a good day for the stock market, I pointed out the way it takes more than one point to draw a straight line, a good stock market environment needs more than one good day to generate favorable and sustainable returns.

While the Dow gapped up this past Tuesday amid a confluence of factors, the odds are the overall stock market will continue to be choppy near term. Before giving my view as to why that is the case, I have to point out that the Dow is composed of 30 stocks and that a better reflection of the overall stock market is found in the S&P 500, which as you may have guessed is composed of 500 stocks. These are but two of a number of different indexes investors can use to benchmark upward and downward moves in the stock market as well as gauge their own investment performance on a relative basis, which for investment analysts and portfolio managers is key in how they are compensated.

The factors that led to Tuesday’s upswing in the market indexes were more or less the same that catapulted it higher on Thursday - the notion that the debt and deficit crisis in the U.S. and in Greece were being dealt with alongside several positive corporate earnings reports from the likes of Google, IBM, Apple and others. Some will point to the better than expected housing starts and building permits figures as part of Tuesday’s more than 200-point rise in the Dow.

As I said during my radio appearance, however, while that was the best housing data in several months, we need to see more than one month of good data to begin thinking a rebound in housing is under way. As we came to see later in the week those housing hopes were short lived as existing home sales in June continued to be weak and the National Association of Home Builders’ housing market index remains trapped at low levels.

What I find interesting and perplexing at the same time is the focus on the debt ceiling and deficit reduction talks by the stock market when a number of companies have missed earnings expectations or offered outlooks weaker than prior forecasts, and prospects for job growth look even more challenging near term. Companies whose earnings and outlooks whiffed include Yahoo, Chipotle, Bank of America, Hasbro and Koninklijke Philips Electronics N.V. to name a few.

On the job front, while weekly unemployment claims remain above the 400,000 market for yet another week, we are hearing from companies like Cisco Systems Inc., Lockheed Martin, Goldman Sachs and others about a new round of layoffs. This is echoed by news that the federal government will shut down 400 data centers by the end of 2012 as part of its effort to close more than 800 federal data centers by 2015. Factor in pending job cuts as state and local government grapple with budget shortfalls and one would have to think that any debt ceiling-deficit program would have some degree of federal job cuts.

In short, it continues to be a mix of good news, bad news which I suspect will lead to more two steps forward, one to two steps back for the market near term.

Of course, this presupposes that a debt ceiling and deficit package gets approved near term. If it doesn’t and more than likely even if it does, which I suspect will be a “buy the rumor, sell the news” scenario, we still have a weak economy and a lack of job creation to contend with, which will weigh in on consumers and their outlook.

Stay tuned.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

About the Author
Chris Versace

Chris Versace

Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...

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