By Palash R. Ghosh
A DOW JONES NEWSWIRES COLUMN
Seems like we've seen this before, but this time it feels a little better.
The stock market has rallied nearly 20% over the past two weeks, mirroring a similar jump in the fourth quarter last year. But that prior rally evaporated during the first two months of the new year as euphoria over Barack Obama's election dissipated amid a wave of harsh economic realities.
The Dow Jones Industrial Average soared almost 18.8% from the multi-year lows of March 9 through March 23 (including the surge following release of the government's plan to buy billions of toxic bank assets). Similarly, the Dow had leapt 19.6% from Nov. 20, 2008, through Jan. 2, 2009 -- before plunging more than 27% over the next two months.
Alan Gayle, director of asset allocation at RidgeWorth Investments, believes the current rally has greater potential sustainability.
"This rally has been accompanied by more credible and substantial policy actions by the Fed and Treasury," he said. "I'm also encouraged by the tentative moderation in some of the recent economic data, including the home sales data and the Richmond Fed activity report. These numbers are far from signaling an imminent recovery, but they may suggest that the worst of the correction is at hand."
From a technical standpoint, the current rally has been far more impressive than last year's. Mark Arbeter, chief technical strategist at S&P, believes so, for several reasons:
-The latest price rise over a 10-day period has been greater than the initial 10-day move off the November lows.
-This rally has pushed the S&P 500 above its 65-day exponential average. In the prior rally, this average was a resistance point.
-The 14-day Relative Strength Index has been pushed above a down-sloping trend line that has been in place since October 2006, and to its highest level since May 2008.
-It has been accompanied by stronger accumulation patterns, as the 6-day and 10-day summation of up/down volume on the Nasdaq has reached its highest level since 2003.
-The 10-day NYSE up-issues ratio has already exceeded the peak we saw during the November rally, and this ratio has hit its highest level in a couple of decades.
-Finally, Arbeter noted, the percentage of stocks hitting 52-week lows during March was 26%, while the percentage at the November lows was 58%, indicating a vast improvement in many charts, despite the S&P 500 being at a much lower level in March than November.
The numbers are nice, but is the present rally sustainable and can it build towards a meaningful rebound?
Frank Haines, chief investment officer at Christian Brothers Investment Services, concedes that while the current rally has been impressive, he doesn't think it can last.
He noted the March rally has come after investor sentiment plunged to historically dismal lows, placing an enormous amount of cash on the sidelines -- cash eager to participate in any rally.
"I think this is just another short-term market rally amidst a prolonged market downturn," he said. "The economy has many structural problems that will take years to work out. There are just too many headwinds for the market to embark on a sustained upturn."
For example, Haines believes the unemployment numbers will get worse, putting more pressure upon consumer spending, housing prices, consumption and, ultimately, corporate earnings and stock prices.
The market seems to be battling between fleeting signs of hope and repeated reminders of an intractable economic calamity. We may continue to see more of these mini-rallies -- but perhaps each successive one will have sturdier legs to stand upon.
(Palash R. Ghosh has been writing about U.S. and international equity and bond markets for the past 17 years. He can be reached at 201-938-2367 or by email at palash.ghosh@dowjones.com.)
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(END) Dow Jones Newswires
March 25, 2009 12:52 ET (16:52 GMT) | 
