The Pause That Refreshes?

07/01/2011 10:30 am EST


Karen Gibbs

Video Network Hostess,

There are still a lot of mixed signals that economies and markets are throwing off, but this could be the ideal setup for the second half of the year, observes Karen Gibbs of The Gibbs Perspective.

The Dow and the S&P 500 managed to pull out of a six-week nose dive and avoid the longest losing streak since 2001. But investors remain skittish about economic growth, and are torn between a market correction of 10% or more and a full-blown bear market with declines of more than 20%.

The six-week sell-off left the major market indices in oversold territory, with the S&P 500 well-below its 50-day moving average, but bouncing off the 200-day. The decline may have moved too far, too fast—tempting some shorts to cover and enticing new traders on the buy side for a quick pop.

Signs of progress in the Greek debt debacle also offer some hope, if only temporarily. Remember, this has been dragging on for more than a year, and other Euro members are facing the same fiscal crisis.

However, a new finance minister in Greece may encourage support from France and Germany, the two Eurozone members most opposed to any help for Greece.

Another bright spot was the decline in crude oil prices below $95 a barrel. Whether on concerns over demand or thanks to an increase in output, the drop in prices will be a welcome break for consumers if it translates to lower prices at the pump.

The Bad News
However, investors remain nervous, as data continues to belie an economic recovery and as the second quarter earnings parade begins. Tech giants Adobe (ADBE), Micron Technology (MU), and Oracle (ORCL) are on tap to release earnings this week, along with Carnival Cruise Line (CCL) and Bed Bath and Beyond (BBBY), just to name a few.

This is also the pre-announcement season—which in street talk means warnings. The financial sector is expected to sound a note of caution as profit margins continue to get squeezed.

Bank of America (BAC) and Wells Fargo (WFC) announced they are exiting the reverse-mortgage business, as it has become too risky as home prices continue to fall.

The labor market remains mired in a deep slump, with weekly jobless claims still averaging above 400,000. Congress remains deadlocked on issues of spending cuts and the deficit, and are too preoccupied to address the issue of job creation, although they do give it lip service.

The only bright spot is the yield on the ten-year note. At 2.95%, a US government default is not priced in.

While the Dow and S&P managed to stem the decline, the Nasdaq continues to lose ground. Growth stocks are suffering with the economy.

However, health care, utilities and consumer staples are outperformers—reflecting their defensive nature—and remain attractive sectors for those who want to remain invested in equities.

The Federal Reserve’s policy making arm, the FOMC, holds another two-day meeting this week. It's expected to announce a steady-as-she-goes monetary policy with short-term rates unchanged at virtually 0%.

The much anticipated end of QE2 has been rendered moot. The rest of this week’s data is more rear-view mirror action, with the final release of first-quarter GDP, first-quarter corporate profits, and May durable-goods orders. Unemployment claims and new home sales may hold the only surprise of the week, and only if they show marked improvement.

We're now at the end of the quarter and the start of a long Independence Day weekend. Consumer confidence and sentiment data is joined by personal income and consumption figures, pending home sales, construction spending, and the Chicago purchasing manager’s index.

An early close for bonds on Friday, and anticipated light pre-holiday trading for stocks, may just give us the pause that refreshes and prepares us for the second half of the year.

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