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Prieur Perspective: Winning Streak for Equity Bulls


Will last week's rally continue?


The short Thanksgiving week brought investors an additional item to be thankful for when stock markets closed higher for 5 consecutive trading days – a rare winning streak last accomplished in July 2007. The S&P 500 Index has gained 19.1% since the start of the rally on November 21 and 12.0% on the week, registering the largest weekly gain since 1974.

Worrisome economic reports were cast aside by equity bulls who argued that the bad news had already been priced in. However, US Treasury Note yields were less sanguine and fell to its lowest level on record, pointing to deflation concerns and suggesting that investors remained skeptical about the government's latest moves to revive the ailing economy. Importantly, US 3-month Treasury Bills were trading at a minuscule 0.03%, an indication that liquidity was still being hoarded.

A catalyst for last week's recovery was the announcement of the government's rescue plan for Citigroup (C), including a direct $20 billion investment and $306 billion in asset guarantees.

With credit markets still not thawing after the introduction of various central bank liquidity facilities and capital injections, the Fed on Tuesday unveiled further steps aimed at lowering borrowing costs for consumers and home buyers. The Fed will buy $100 billion of debt from Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Home Loan Banks. In addition, the Fed will also purchase up to $500 billion of mortgage paper backed by the agencies and will lend $200 million to holders of key asset-backed securities regarding small business and consumer loans.

Has the stock market reached a secular low, or is it just bouncing off oversold levels? On the Fox Business Network, legendary investor Jim Rogers said:

"We're ready for a rally. I mean, the market in October and earlier this month has had a huge selling climax. I covered a lot of my shorts. Who knows if I'm right or not. But I expect the market to rally for some time. It may rally into next year. But ... this is a false rally. It's not going to be great. It's not the end of the problems in America and it's not the end of the bear market."

A positive for the bulls is that the period after Thanksgiving through the end of the year is usually a strong time for stocks. According to Jeffrey Hirsch (Stock Trader's Almanac): "December is normally a banner month for stocks, ranking second [on the monthly calendar] for the Dow and S&P 500 and third for the Nasdaq."

Should the bullish seasonal tendencies hold true, possible first targets are the November 4 highs of 9,625 for the Dow (current level 8,829) and 1,006 for the S&P 500 (current level 896). This will also result in both indices clearing their 50-day moving averages.
No positions in stocks mentioned.
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