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Sunday, June 7, 2009

Weekly Review - building toward better things?

Today I spent a big chunk of time building a door frame for a storeroom in my attic. This is part of the never-ending renovation of my 100 year old house. Besides the fact that it has kept me from focusing on my usual Weekly Review post, it got me thinking about the economy.

I started things today by ripping out the stuff that was falling apart. Then I putt up a rough opening with 2X4's and proceeded to the finish work. There was cutting and trimming, adding shims to make sure everything was plumb. Yes, some things needed redoing. By the end of the day, the door itself still wasn't hung but most of the heavy lifting was done.

So how does a door frame equate to the economy? Look at the chart below. Plenty of missteps and redos. But little by little, something decent is taking shape in the stock market. Likewise in the economy, the things that were falling apart are little by little being replaced. With the help of the Fed and the Treasury, some 2x4's have been put in place to reinforce the sagging banks and financial system. The government is now applying the shims as new approaches to regulations are debated to straighten out a financial system that had gotten out of kilter. In any case, the foundations for a resurgence in the economy are slowly rising. The bullishness in the chart below, therefore, is seemingly justified.


The chart above shows our analysis of the universe of stocks we evaluate, roughly 7200 of them. We can see from these moving average statistics that after a very constructive phase we have been going through a period of indecision. Though the charts of the major averages are looking like there was a bit of a bullish breakout this week, our statistics show we are still somewhat range bound.

The next chart provides our trending analysis. Looking at the number of stocks in strong up-trends or down-trends based on Aroon analysis reveals a market that is in neutral but with a tendency toward improvement. While the number of stocks in strong up-trends is not extreme, the number of stocks in strong down-trends is very low.


So the economy and the stock market do seem to be building toward better things. The Non-Farm Payrolls report showed a much smaller number of layoffs than expected. Construction spending surprised to upside. It's true, the unemployment rate is hitting multi-decade highs and many retailers are still limping along but everything can't be fixed at once.

Just like my old house, there is still a good bit of construction necessary to restore this economy to its former glory days. But we're making progress.

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