Tuesday, October 14, 2008

Rally Thoughts
Yesterday's market rally was a welcome relief. I'd like a few steady days. I just saw this article from the Financial Times that brings up some good points and historical perspective. Here are a few paragraphs that stood out:

As for the trend, when the Lehman Brothers collapse started this phase of the crisis, the S&P 500 stood at exactly its average for the previous 50 days. Even after Monday’s bounce, it would need to rise 20.5 per cent more to get back to that average.

Further, we need to look at what prompted the bounce. The latest actions to bolster the international banking system are extreme. Other actions that looked extreme at the time had no impact. It would have been alarming if they had not had a response now.

How could the bounce turn into a rally? First, stocks need evidence of a thaw in money markets. Once there is no need to price in some chance of an all-out banking collapse, equities should be able to rise.

Second, the market needs to gauge the impact of this financial distress on profits. Earnings season for the third quarter is just starting; it is far more important than usual.

The last two paragraphs are what to watch for in the very short term. I would add that fourth quarter earnings, which will show the impact of the banking bailout, will also be important.

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