Stocks Bull-market Rally or Bear-market Fake?

By: Money_Morning

William Patalon III writes: It came right down to the wire, but the Dow Jones Industrial Average ended the day Friday with its first four-day rally since November, ending the week with a gain of 9.0%. And despite that robust performance, the Dow was the laggard among the three major U.S. stock indices. The tech-laden Nasdaq Composite Index soared 10.6% while the broader Standard & Poor's 500 Index edged it with a weekly gain of 10.7%.

Fuel for the rally came from several sources. Stocks had sold off sharply coming into last week. But then such beleaguered banks as Citigroup Inc. ( C ) , Bank of America ( BAC ) and JP Morgan Chase & Co. ( JPM ) started to talk somewhat bullish about earnings.

The rally was a confluence of forces. There was a significant sell-off coming into this week, as well as a dearth of positive news, then Citigroup, Bank of America, and JPMorgan Chase started talking about earnings and Washington was supportive on a couple of levels.

Investors also were encouraged by comments made by National Economic Council Director Larry Summers, who in a rare public appearance contended consumer spending appeared to have stabilized, according to TradeTheNews.com .

But the question now becomes: Where do we go from here?

Art Hogan, chief market strategist at Jeffries & Co. ( JEF ) , said that “what's important is we haven't retraced any of the week's moves. Even if it's a bear market rally, the good news is the duration.”

The stock market is a discounting mechanism, meaning it prices assets according to what will happen, as opposed to what is happening right now.

But whether this is a kind of “dead-cat” bounce - with more bloodletting to come - or is the start of a sustained rally that signals a turnabout in the U.S. economy - is just too early too early to call .

Some key things to watch this week:

• The continued analysis of this weekend's G20 meeting and subsequent recommendations.
• U.S. Federal Reserve policymakers meet Wednesday; although they cannot cut interest rates any more, investors will watch to see what other moves the central bank could make and - just as importantly - what policymakers will have to say. Some analysts are speculating the central bank may choose to purchase long-term Treasury bonds or even additional Fannie Mae ( FNM ) or Freddie Mac ( FRE ) debt.
• Investors also will be getting insights into the economy's health with reports on jobless claims, housing starts, industrial production and inflation at both the consumer and wholesale level.

Market Matters

Citigroup announced that its first quarter would actually show positive earnings and other financials followed with similar projections. Citi Chief Executive Vikram S. Pandit stated that the one-time megabank has been profitable for the first two months of the year and JP Morgan Chase's top exec echoed the cheerleading on his own institution's behalf.  Not to be outdone, Bank of America's Kenneth D. Lewis claimed that his bank should not need any additional government capital.

Freddie Mac lost $24 billion last quarter and needs another $30 billion in bailout funds; Merrill Lynch & Co. Inc. stands accused by the New York Attorney General of misleading Congress (and investors) about its bonuses.

Oil rose late in the week to close above $46 a barrel as traders speculated that the Organization of the Petroleum Exporting Countries could limit production even more at its weekend meeting after an energy agency cut demand projections by another 200,000 barrels a day.  Investors welcomed news that Citi's situation may not be quite as dire and continued buying on rumors that the Financial Accounting Standards Board (FASB) may suspend mark-to-market rules.

Financials led the rally and healthcare climbed as well on the merger news concerning deals involving, first, Merck & Co. Inc. ( MRK ) and Schering-Plough Corp. ( SGP ) , and, second , Roche Holding AG (ADR: RHHBY ) and Genentech Inc. ( DNA ).

Economically Speaking

On the heels of the upcoming G-20 meeting, U.S. President Barack Obama suggested a more coordinated stimulus effort to help revive the worldwide downturn. His remarks were not very well-received by some of his trading partners, who felt that Obama insinuated the Europeans weren't doing enough to jumpstart their respective economies.

Meanwhile, China lashed out at U.S. officials about the outlook for the domestic economy and, in particular, U.S. Treasuries [For a related story in today's issue of Money Morning , please click here ]. As America's largest creditor nation, China remains concerned about its investments in U.S. securities in light of the mass spending on domestic issues.

While the economic calendar was relatively light, the actual numbers offered a tad bit of “promising” news. Retail sales dropped 0.1% in February, but actually climbed once auto activity (rather inactivity) was dropped from the equation. In fact, businesses as diverse as furniture, electronics, and attire all experienced sales increases last month. The revised January retail number depicted the best increase in level of activity in three years.

The U.S. trade deficit shrank for the sixth straight month in January and now stands at its lowest level since October 2002. Declining imports and exports revealed further contraction in the global demand for goods and services. The weaker labor market remained quite concerning as claims for unemployment benefits have set records in six of the past seven weekly releases.

Weekly Economic Calendar

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