Market Insider: This Rally Could Have Claws

Beware of the bear.

Traders say the stock market looks better; acts better and feels better, and might actually be on an uptrend, for now. Stocks have gained more than 6 percent in the past two sessions, and major indices are up about 20 percent since the Nov. 20 closing low.

But they also say this upswing has all the feel of a bear market rally, and it could easily turn around and bite you. Already after Monday's bell, two major companies - FedEx and Texas Instruments - reminded investors that earnings estimates have been too high and will continue to decline. FedEx shares slid after it cut full year profit expectations, saying package delivery demand is dropping. Texas Instruments pared back its expectations for profits and revenues in the fourth quarter and said it was suspending hiring efforts.

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President-elect Barack Obama's revelation this past weekend of some of his ideas for fiscal stimulus projects, along with optimism that Detroit auto makers will get a bailout, helped send stocks higher Monday. The Dow rose 298.76 points to 8934, a gain of 3.5 percent. The S&P 500 was up 33 points or 3.8 percent to 909.70.

"It's looked very oversold here for a period of time, but it's hard to tell with sentiment and everything else," said John O'Donoghue, co-head of equities at Cowen. "Today was a better volume day than we've had for awhile. I think we're in very uncharted waters here where this level of government interaction or potential level of government interaction is unheard of."

The stimulus proposals include massive spending on the types of infrastructure projects not seen since the 1950s. In response, construction stocks like Caterpillar and Granite Construction , went flying. Commodities, like gold and energy, also rose. Oil rose 7 percent to $43.71 per barrel. Traders said the moves in commodities was also driven by the decline in the dollar , which was off 1.7 percent against the euro Monday.

The Nov. 20 lows came just before news that President-elect Obama had chosen New York Fed President Tim Geithner to serve as his Treasury secretary. The market, for the most part, has respondend favorably to his series of appointments and promises on the economy.


On the calendar for Tuesday are pending home sales at 10 a.m. and the NFIB small business survey at 7:30 a.m. Fed speakers Tuesday include Fed Governor Randall Kroszner, speaking on assessing financial markets instability at 8:30 a.m.; Fed Vice Chairman Donald Kohn on restoring financial intermediation by banks at 11 a.m., and Dallas Fed President Richard Fisher on the financial crisis and economy at 1:45 p.m.

O'Donoghue said it's a sure bet that any economic news now will be dismal. "It's just bloody awful, but quite frequently you never know until you're out of somewhere ...," he said. He also said the market's action has all the signs of a bear market rally.

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"I do think you could get Dow 10,000 and S&P at 1,000 before the end of the year. Markets tend to like round numbers ... But I'm not a big believer in it right now. We've had so many cataclysmic moves both to the up and downside, nothing would shock me," he said.

Patrick Kernan, who trades S&P 500 options, said he sees investors continuing to bet on a very volatile market. "I don't think we're going to see the 700 handle again on the S&Ps, but I think we'll get down to 800 before it's all over," he said.

"It feels a lot better than it did a few weeks ago, but I just think if one large player would decide to start selling, we could be down 50 or 60 tomorrow in the S&Ps," he said.

Kernan, a managing partner at Cardinal Capital, said one of the factors affecting the markets are the lack of players in the futures market. "It doesn't seem right now that it takes that many large players to go one way or the other and move the entire market," he said.

"It still just looks really bumpy. I would feel very comfortable saying we could trade 800 in the S&P. 950 wouldn't shock me at all, but I think we'll trade 800 before we trade a 1,000 again. If we got back down there, I wouldn't be surprised if in a couple days we'd have a very strong rally again," he said.

Questions? Comments?