From the August 01, 2010 issue of Futures Magazine • Subscribe!

Stock indexes: Up in the air

What’s moving the market?

Analysts say economic news, earnings and interest rates will move stock indexes for the rest of the year.

“It’s going to be about earnings. That’s what we’ve rallied on. It’s not about a ton of profits, it’s about cost-cutting and that’s where the profits have come from. If [companies] have good earnings, we’ll see the market continue higher,” Levin says.

Bush says the market will be fueled by record low interest rates the rest of the year. “Many traders are focusing too much of their attention on domestic and international problems such as the sovereign debt issues in Europe. Historically low interest rates will solve all problems, at least in the short run,” he says.

On the other hand, Friedman says that the sovereign debt crisis in Europe and the question of whether the euro will survive, along with U.S. employment numbers, will affect the market. “If you can get employment to go up, you’ll get more confidence,” he says.

The speculation of a double-dip recession itself could also move the market. “We’re going to continue to get scary data out of the housing market and unemployment will pick back up and those numbers are going to be important because it’s going to smash the optimism we’ve been seeing. We’re going to see strengthening gold price[s] and probably rising oil and those two numbers are going to wreak havoc on stocks,” Wiggin says. “All of this uncertainty about the euro has the ironic role of pushing people into the dollar and Treasuries, which sometimes actually bolsters stocks on NYSE when people get nervous about Europe. If there isn’t the headline optimism of a recovery, then any kind of bad news coming out of Europe is going to be bad news for U.S. stocks.”

Bush, however, is bullish. “Buy into any negative news where sell stops might be hit [and] use that as an opportunity to establish long positions. We’ll see some recovery gains and the bull market reasserting itself this summer and fall,” he adds.

Friedman, who also thinks stock indexes are headed higher, says traders should invest in commodities and gold. “Commodities should go up. China will be a contributor to buying corn, wheat, and maybe copper. Of all the commodities, you should be long gold. Gold’s going higher in the next two to three years,” he says.

Levin says, “Even though the market’s going up, you still want to pay intelligent prices for investing vehicles. You have to be buying on the way down. When the market’s dropping, investors should get involved. The best investing method is to buy on the way down.” For the rest of the year, he says investors should trade institutional banks and brokerages and tech stocks and avoid retail and energy stocks.

Not your average bear

Some analysts point out that this recession is different from past recessions and the recovery period will be different too, which will have an impact on stock indexes.

After all it is easy to forget that less than two years ago we were looking at a total collapse of our economy and many experts were comparing what was going on in the economy with the Great Depression.

Hackett says that past recessions have been followed by V-shaped recoveries, but “We’ve never had this kind of debt to GDP before. We have an economy that’s trying to come out of recession and grow at a time when debt is too high. Instead of the money creating credit to allow for more spending and more borrowing, the exact opposite has been happening. That growth is being used to pay down debt instead of [increasing] economic activity. [The recovery] is going to be a W-shaped pattern,” Hackett says.

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