Wednesday, November 30, 2011

Encouraging Bounce, But Will It Last?

The surge in stock prices over the last two days is impressive on the surface.  Will it be a sustainable rally of more than 5-10%, or is it just a technical bounce in an oversold market?

A longstanding adage of investing in the U.S. was "Don't fight the Fed," as monetary conditions in the financial system were considered a key determinant of the direction of stock prices.  But as Alan Greenspan's tenure went up in smoke, the adage became less foolproof.

The news that the developed world's major central banks made concerted efforts in increasing liquidity to preempt further strains in the European banking system--along with better economic news in the U.S.--was the catalyst for the surge in stocks.  But in the U.S. at least, trading volume today was relatively light given the big jump in the indexes, so volume at least today did not corroborate the strength of the move higher in stocks.  That is not a sign of a robust, sustainable move higher.

I've thought recently that stocks were technically oversold and due for a bounce, but was not as confident as I was at the end of September of a major move higher in stock prices.  I erroneously have avoided European stocks because of concerns about potential currency losses if the Euro would fall sharply.  So far I have missed opportunities there.  Yet, the constraints on the European banking system from the need to rebuild capital is curbing credit and constricting economic growth--for an extended time, I'd guess.  There are several European stocks that I find attractively valued, but after gains of nearly 10% in a few days, I'd wait for a correction before making additional purchases.

Steve Lehman

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