This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Sunday, June 28, 2009

Light at the end of tunnel

The numbers for durable goods orders were released June 24 and were higher than expected. This marks the third increase in the past four months, all of which have been unexpected in the market. As a result, the market saw some gains early in the trading day, but, unfortunately, those gains could not be sustained.

However, it’s important to remember that this is still positive news. Demand for production goods in this country is still recovering, and that’s a good thing.

Looking back over the past year, this economy has followed the typical steps in a recession, instigated to some extent by the credit crisis.

First, production demand fell and manufacturing slowly reacted, building up inventory. Eventually, companies had significant inventories and production grounded to a creeping pace. This meant falling prices on big goods (cars, homes, etc.) and higher unemployment has companies cut production.

However, even more important than the past year is what is likely to happen over the next year or two as the recession plays out. As the economy kicks back into gear, companies will work through their existing inventories and production will pick up speed to meet growing market demand. Once demand is deemed sustainable, companies will begin hiring to bring their production back to the target levels they decide based on demand.

So while upticks like the ones seen in the monthly increases in durable goods orders may seem small, keep an eye on the big picture and look for the light at the end of the tunnel. The turnaround may not be as fast as we like, but it will happen.

In the stock market, the Dow Jones Industrial continues to bounce around the 8300-8500 level. After a recovery that lasted several months, the market seems to have run out of steam and seems to lack confidence. Good news continues to come out on everything from home sales to the savings rate, but after a brief jump in the market news seems to be quickly discounted and the market again loses its luster.

This could be due to several things. One is the old philosophy of “sell in May and go away,” the belief being that many big traders on Wall Street abandon positions to take the summer off with their families. However, in light of events this past fall, this seems less likely than the uglier alternative.

The alternate explanation is that the market is setting itself up for a (downward) correction. Remember, that while is Dow is nowhere near its previous highs, it has seen a substantial rally so far this year, approximately 35 percent from bottom around 6550 to its most recent top. Since topping out around 8800, the Dow has stagnated.

The question is where we go from here. Unfortunately, there is a distinct possibility that if the Dow falls through its support level around 8000, we could revisit its March lows in relatively short order. On the other hand, the longer that the market can hold this level, the less likely it is to retreat further.

While it may be hard to see, underlying pessimism in the market is causing it to stutter after the original jump caused by any good news. Thankfully, with each bit of good news that comes out, that pessimism seems to be fading as good-news-rallies grow larger and longer. While there isn’t much excitement in the market, rest assured that eventually more and more investors will regain their optimism, and the exuberance that will follow will be something to behold.

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