Sniff Out the Quality
By Rev Shark
RealMoney.com Contributor
6/19/2006 8:17 AM EDT
"Hope begins in the dark, the stubborn hope that if you just show up and try to do the right thing, the dawn will come. You wait and watch and work: you don't give up."
--Anne Lamott
After five weeks of misery the major indices finally managed to stop going down last week. The S&P 500 and Nasdaq were still negative for the week but they did manage to cut their losses on a very broad and strong bounce Thursday. After that refreshing change of pace, it's tempting to conclude that the worst is over and that we will now proceed to slowly recover and work higher. Unfortunately, a recovery is unlikely to be smooth or easy.
Although the market did finally show some signs that it is pricing in the barrage of hawkish jawboning that Fed members have inflicted upon us in recent weeks, there will continue to be a lack of uncertainty until the FOCM meeting next week. It is doubtful we will have any more clarity about interest rates and inflation until that meeting.
Bernanke and his crew are making it quite clear they are on guard against inflation. The market seems to have taken them seriously over the last few weeks but that creates another worry: Will the fight against inflation kill the economy? Fed members have shown a clear preference for killing inflation even if it means slowing down the economy, and the market is still very confused about how this will play out. Until the FOMC meeting next week this uncertainty is likely to keep the market contained.
In addition to confusion about the Fed we have second-quarter earnings reports approaching. As companies wrap up the quarter we have the additional danger of earnings warnings over the next couple of weeks.
On the other hand, the recent market pullback has been indiscriminate and a lot of companies that are likely to have good quarters have been punished along with everything else. The market should begin to sniff out those companies that present some good trading opportunities if you can identify them early in the game. That is going to be my primary task over the next couple weeks.
So right now we wait and watch and work. We would be foolish to expect a quick and easy recovery from here but we also are showing some signs of stabilization and it looks like there may be some support at current levels. This is a market that will require patience and, hopefully, will put a premium on superior stock picking as earnings season approaches. Stay tough, stay patient and the dawn will come.
We have a positive start as we kick off the week. Asian stocks were slightly weak as interest rate worries bubbled up but Europe is showing some strength on some major corporate deals. The dollar is perking up and oil is trading down.