Ugly Facts Trump Pretty Stock Charts

11/01/2011 10:09 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

After the best run for equities in decades, inauspicious omens are piling up, writes MoneyShow.com senior editor Igor Greenwald.

The best month for stocks in 20 years is history, but it lives on in a multitude of beautiful charts, all with the same beguiling message.

You’ve probably seen one: There’s the western wall of a canyon etched by August’s waterfall declines, a two-month base-building exercise culminating in the early October retest of the prior lows, and then the steep right-hand rise tracking the past month’s derring-do.

Because the rally has been so broad, there are very few bad charts outside the financial morass. The tech stocks that have more or less fully recovered augur well for miners, whose own comeback to this point has been less convincing.

The message of the charts, reinforced by middling economic statistics and resilient earnings reports, is that the recession fears that spooked investors this summer were overblown.

Of course, the charts don’t know that Europe’s policies of austerity and financial obfuscation have just been challenged by a referendum in that cradle of democracy, Greece. Those great October charts can’t know that, so far in November, investors are avoiding Italian stocks and bonds like a plague.

One can’t tell from the charts that China—which relies on European exports even more than those to the US—has just posted its most downbeat manufacturing survey in three years, or that Chinese real estate prices have been under pressure for the last two months.

Nor can one tell from the charts that those solid third-quarter US earnings were leavened by discounted bank bonds and share buybacks, while profit forecasts for the next six months are in broad retreat. The charts are mum on the fact that Congress is about to embrace austerity—either by default, or as part of the budget deal, with unfortunate consequences for the economy in either case.

The US economy is relying heavily on business equipment purchases and consumer spending from savings to overcome high unemployment, depressed housing, and non-existent gains in real incomes.

Add it all up, and it seems probable that there are more canyons in the stock market’s immediate path.

If the past month proved anything, it’s that the right time to buy is when the charts look awful. And we’re not there just yet.

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