Market's Big Question: Real Rally or 'Dead Cat Bounce'?

The recent spate of improving economic numbers, from manufacturing to jobs to the consumer, carries for some, a distinctly feline aroma.

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That is to say, while the economy may not be tumbling off a cliff like it appeared just a few weeks ago, things are far from fixed and the recent stock market rally may just be a natural, technical rebound following a six-week selloff.

"That's your proverbial dead-cat bounce," Lakshman Achuthan, co-founder and CEO at the Economic Cycle Research Institute, told CNBC. "There's some false hope that there is a rebound here in the economy or in global industrial sectors in the second half."

Shorter-term indicators such as purchase managers indices, price inflation trends and the stock market have improved since late June. But they were still only ahead of lowered expectations and hardly indicative of a bustling economy.

At the same time, longer-term indicators, such as structural unemployment and foreign manufacturing, are still weak and likely to hold back growth, Achuthan said.

"The global industrial slowdown is going to be present through year-end," he said. "This is not a a transitory event."

Yet the stock market appears back in a familiar pattern that began when the financial crisis of 2008 and 2009 started to wane, in which economic news that merely beats expectations, rather than shows significant strength, is enough to spur buying.

Wall Street rallied Thursday, for example, when the monthly private sector hiring report from ADP and Macroeconomic Advisors showed 157,000 jobs created from May to June, a number that was well ahead of estimates.

ADP numbers have been on average about 41,000 lower than the monthly nonfarm jobs report that will come out Friday. Should that trend hold it would put total job growth at nearly 200,000, which is about 50,000 above the level to simply maintain the current jobless rate of 9.1 percent.

But the ADP numbers have been consistently inaccurate, and the weekly jobless claims numbers have remained stubbornly above the important 400,000 level.

Still, several analysts revised their projections higher from the original 90,000 or so new jobs expected to be reported Friday.

"They're not that fabulous but they are supportive of the view that the economy is stabilizing," Josh Feinman, chief global economist at Deutsche Bank Advisors, said in reference to the recent data. "We had a loss of momentum earlier this year, no question, and the economy's growth pace slowed down particularly relative to what was expected. In fact some people worried about a double dip. The recent data have helped allay those fears."

Factors working against the economy earlier in the year included the Japanese earthquake and tsunami as well as a spike in energy costs that briefly pushed prices at the pump past $4 a gallon. Japan's recovery has progressed, and oil prices have fallen, though food prices remain elevated.

Those two factors combined helped soothe fears that the global economy was heading for another recession.

But with the European debt situationgiven only a short-term remedy and housing and unemployment likely to continue to stifle US growth, talk of a robust recovery is finding considerable skepticism.

"As we go through the summer we're going to be concerned with some additional issues," said Kevin Caron, strategist at Stifel Nicolaus. "We're going to be talking about the debt ceiling. But more specifically when we look at the budget and what comes next—higher taxes and lower spending—up against the economy that still has a lot of slack in it, put some additional angst into the mix for the forward-looking projection for next year."

Countdown to Jobs Friday

One other significant factor is in the dead-cat mix: The greatly reduced presence of the Federal Reserve, which has injected more than $600 billion into the economy through Treasury purchases over the past nine months but has said it is done with quantitative easing, at least for now.

The market's rally since September 2010 can be traced directly to the Fed intervention, more of which will be a hard sell politically and a risk to inflationary pressures.

"They're not in the driver's seat," Achuthan said. "They're lucky if they're in the passenger seat. They're probably in the back seat. The business cycle is the much stronger element here."

Achuthan said the "best-case scenario" is the "end of the year" for recovery. "That's if everything starts to lift from here, if the skies part and the sun comes out."

As such, investors either will be content with slow growth—likely to be in the 2 to 3 percent range for gross domestic product at best—or rebel once the dead cat stops bouncing.

"It's not like we should be expecting a rip-roaring economy," Feinman said. "Better, but make no mistake we have a long climb back to repair the damage of the recession and the financial crisis."