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The Weakest Sectors Are Signaling Market Bottom

Apr 5, 2008
Well, with a gain of over 3% last week S&P as the leading provider of financial market intelligence gave a boost to equities and the market sentiment in general.

Meanwhile, some of the weakest market sectors, ones that have led the recent declines like the homebuilders and financial stocks, these sectors which have sold off sufficiently are currently on the rebound.

Toll Brothers (NYSE: TOL), for example is trading nearly 20% above its low. Pulte Homes (NYSE: PHM), D.R. Horton (NYSE: DHI) have rebounded even further. Additionally, the combination of lower housing prices and aggressive rate slashing which has never failed to jump start the economy or the stock market - has set the stage for a turn in the housing market.

Home prices are clearly showing some signs of stabilization with the rate of liquidation of unsold new homes getting near benign levels.

However, we can not see pessimism unwind in the wake of these data. Undeniably, a considerable amount of bearishness on the Street remains dominant, since we find ourselves in this almost universal sense of markets being in permanent decline.

But regardless of this pretension, fact remains the market has endured a good deal of bad news of late and yet it has held its ground. Last couple of weeks despite a few disruptive trading sessions, the big cap blue chips (the big kahunas of the financial world) performed quite well. That's extremely encouraging and it suggests the worst is already baked into share prices.

So taken altogether, housing and banking may be the weakest sectors of the economy, but the bottom is in view. And if the weakest sectors are bottoming - that's good news for the rest. Worth noting is that most of the trouble today is confined to the financial sector. If we exclude financials, S&P profits continued to grow in the 4th quarter during fiscal 2007, and are likely growing now.

I think the performance of equities in the last several days should be taken in conjunction with the current strength that the market is showing fundamentally. Economic statistics so far have been more smoke than fire. This assumption is based on numbers that cannot be argued with. For example , Unemployment Insurance Claims actually declined to 50,000 from 60,000 during the first week of March, indicating that growth is indeed slow. But this is well below the number of claims associated with a real recession.

Another number that's hard to argue with is industrial commodity prices, which continue to set new highs and are strongly correlated with worldwide growth and corporate profits.

Having said all this - I am sure of contrarians views - but after all, exchange of ideas and valuations from different perspectives make conclusions even more convincing.

I have continuously argued and still contend that the problems in the financial sector and the larger economy in U.S emanating from the persistent drop in house prices is that they will eventually end, and the underlying resiliency of the U.S. economy will reemerge - as it has always been the case.
About the Author
Ron Haruni has taken his principles of financial and investment management to create targeted investment disciplines. Through his writings, he has created proprietary models providing a comprehensive methodology establishing specific investment ideas. Visit author's website http://wallstreetpit.com
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