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Needing Confidence



Clearly, Consumer Confidence is weak due to jobless recovery, which is a near-term negative. That said, Consumer Confidence didn't change much until two years after the last recession (Exhibit 1). It bottomed in 1992, but retested the 60 level twice over the following two years - yet stock prices generally rose during that period with some near-term corrections and pauses. This seems applicable because the markets are in the midst of one such correction/pause now.

Source - Baseline Inc

In our view, we would rather not change our intermediate-term outlook based upon near-term action as long as there is limited fundamental and technical deterioration in the intermediate-term landscape. While Consumer Confidence remains weak and fears mount that economic growth is suspect, the vast majority of FTN Midwest Research's Independent Market Research (IMR) suggests fundamental improvement, sequentially.

Prior momentum driven rallies since 1970 had as much as a 10% correction before continuing significantly higher over ensuing months and even years. We are careful to not try and call trading bottoms or tops, but do want to outline aspects of the development for both. Our work suggests limited fundamental change while interest rates that have again dropped to near historic lows coupled with extreme near-term oversold readings for stocks and increased levels of fear.

By definition, every correction looks like it is the start of something larger or stocks would never weaken to begin with. As we said, we are not going to try to make a trading call, but the environment remains ripe for some level of a bounce. We continue to hunt for fundamental and technical change that would warrant a more significant intermediate-term opinion change, and to date find very little. So far, this is a nasty correction and in our view, the more telling data will emerge in a bounce versus further downside in a market that has already moved lower.

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