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As stated in an earlier article, sometimes the best movement is standing still. As true as that is, after the three month economic rally we’ve seen, it’s time to stop and refocus. In a conversation in the comments of a previous post concerning the new Northrop Grumman contract, this author made the following comment, to the agreement of both parties involved in the conversation, “However, you mentioned we had the biggest rally in history. That is true, and it concerns me slightly. Our recession hit a false bottom. I’m afraid that people will get too excited and we will hit a false rally. I’d like to see a slow, steady rally as we rebuild a firm foundation under it, instead of just setting up another rollercoaster ride.” That is exactly what you are currently seeing.

We are stepping sideways at the moment, and then taking a step or two back to take a look at what we are currently doing. That is healthy and, albeit strange to admit, encouraging. Investors have been gutsy but smart and it paid off for three months in a nice rally. Investors are now backing off with the news that the signs of economic growth have slowed down and will need more solid evidence of recovery before going further. With the fear of rising interest rates, inflation, the falling value of the US dollar and rising commodity prices, it is understandable and healthy.

The falling dollar and inflation are silently strong concerns. Worries over government debt (partially created by the entire TARP fiasco) that has started to lead to a little extra printing is beginning to drop the value of the dollar. Combine that with worries of inflation or a raise in interest rates due to impending efforts by the Federal Reserve to trump inflation and you have a very insecure economic system on which to run a stabilizing market. Be encouraged, however, because investors are doing the right thing and the economic slowdown after a hefty rally is a great, healthy thing. This allows the market to even out and build under the new rally before starting another one and gives the government time to begin giving the dollar economic CPR and allows the Fed to control interest rates and inflation. Everyone wins.

“A sideways move in the market is actually a corrective move. You get rid of the overbought condition when you move sideways,” said Keith Springer, president of Sacramento-based Capital Financial Advisory Services. Analysts and experts warn that the rally was a bit too much for the economy to handle and that a slight pullback is in order to recap and solidify before moving any further. The S&P 500 index rose 40% since March, something that normally takes years to do. That is huge and requires a healthy break to assess the situation and look for positive news before pressing on. The major indexes moved less than 1% last week, creating a nice firm halt. “I’m inclined to take the market action the last two weeks as reasonably positive,” said Uri Landesman, from ING Investment Management global growth strategies.

Jeremy

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