'Small Victories': Market Looks for Glimmer of Hope

While a modest bump in retail sales and a bit more confidence in the banking system do not a bottom make, this week's events have finally given the bulls something to talk about.

Oliver Quilla for CNBC.com

By many accounts this is how a turnaround happens: An important economic indicator surprises to the upside and the critical banking sector starts to show some strength.

While even the most optimistic investors would be hesitant to call a turnaround point in the market, there at least is hope that a much-expected market bounce from extremely oversold conditions is beginning to take hold.

"A lot of the trap doors are being opened and you're not getting these major surprises anymore. That's why you're getting some investor confidence," said Nadav Baum, managing director of investments for BPU Investment Management in Pittsburgh. "Greed is as big an emotion as fear, and those are the two that control the market."

The market absorbed two critical pieces of news Thursday: Retail sales posted a surprising 0.7 percent gain, excluding automobiles, in February, while General Electric announced its credit rating had fallen to AA+.

The markets have responded in kind to a week of decent news, with the major indexes up 7 percent or more this week.

Rather than simply beating low expectations, the retail numbers were legitimately decent for a recession. Moreover, January's numbers were revised upward to a 1.8 percent gain, another surprise.

As for CNBC.com-parent GE, investors actually cheered the downgrade on apparent sentiment that it could have been worse, and that the company nevertheless can continue to conduct business more or less as usual despite deep troubles with GE Capital, its financing arm.

"It feels very, very much like that mystical sense that the market got together in its own way and said 'enough' at least for a while," said Diane de Vries Ashley, managing partner of Zenith Capital Partners in Coral Gables, Fla. "We simply can't stand the doom and gloom anymore and it's time to look for something, anything, that looks better."

A retail recovery is seen as one of the lynchpins in an economic turnaround as consumer spending represents two-thirds of all economic activity.

Consumers face the dual threat of growing unemployment and tightening credit conditions, yet seem to be overcoming the barriers to at least get out and shop for smaller-ticket items, even if they're still not buying cars.

"Certainly retail numbers are important in the sense that there has to be some independent agent driving growth and demand at this point," said Kurt Karl, chief economist at Swiss Re in New York. "The best for that globally is the US consumer. It will come first like today in purchases not necessarily in high-ticket items like cars and houses, but ongoing consumption of goods and services."

As inventories are reduced and demand retreats to supply, companies that survive the downturn can find some more solid footing and the sharp scalpel of layoffs can be withdrawn from the faltering economy.

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Under such circumstances, economists can at least begin to see the shadow of a turnaround, even if that's not expected to happen for months.

"It's going to be small victories for the next six months," Karl said. "We'd love it to turn a sharp corner, but unfortunately with this kind of tight credit it's tough for the consumer to borrow, tough for corporations to borrow. It's more likely to be slow steps in the right direction."

One of the real wild cards in the turnaround is banking.

The battered sector took a sharp turn higher this week after a memo surfaced from Citigroup CEO Vikram Pandit that the company was having a profitable year so far.

The news drew plenty of skepticism, but traders piled back into the stock and sent it off lows that briefly dipped below $1 a share.

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And while it's no secret that the company still has billions of toxic debt on its balance sheet, confidence grew that Citi may be able to avoid nationalization.

"It's clear that it's the financials that are leading every bit of this forward," Ashley said. "People want to stop beating them up. That's the route to salvation."

What could be giving investors as much confidence, beyond the simple truth that many stocks are vastly undervalued, is that the week may have marked a signpost for transparency.

"Remember, people do want to own stocks. They just don't want to get involved in something that they really fundamentally can't get a grasp on," Baum said. "I understand the risk in the stock market. I also understand that over time I can expect 8 to 10 percent rates of return. All I'm looking for as a client and an adviser is that normalcy."

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