For the first time in a long while it's OK to get (a little) excited about the stock market.
The Dow is up more than 2 percent today and on top of Monday's 7 percent surge we could be heading for the best monthly gain since 1987. Happily, the bulls are also running in the most troubled sectors including banking and home builders (tech stocks and bellwethers like GE are pulling their weight too).
- New home sales jump 4.7 percent, and while the overall sales numbers are abysmal, analysts are finally seeing hints that the housing market may stabilize. High Frequency Economics says: "Sales remain incredibly weak but, as with the existing sales numbers, we are prepared to hazard the view that the post-Lehman meltdown is now over and the market is stabilizing. That's not the same as a recovery, but it is better than continued declines in sales." The message for stocks: Cautious optimism is better than none at all.
- Durable goods orders rose 3.4 percent, a big surprise for markets expecting a 2 percent drop. There's noise in the numbers (revised January orders fell 7.3 percent), but the first gain in seven months is a reason to hope the pace of decline in the factory sector is at least slowing.
- The Obama/Geithner plan continues to be viewed as a possible solution to banking sector problems (and I stress "possible").
All good things, and whatever the reason for the rally, any bit of bullishness is welcome. Still, a word of caution: Always remember that a couple of good economic reports do not a trend make. The banking sector is still broken, and while the impact of government stimulus past and present should help put a floor under equities, not everyone is breaking out the champagne just yet.
So what could go wrong?
According to the WSJ, corporate debt markets -- the real test of how companies feel about the state of the economy -- remain a holdout in this rally:
Corporate debt is still priced for disaster. Investment-grade nonfinancial U.S. corporate bonds rallied in January but have now stalled, with spreads around four percentage points over Treasurys, Markit iBoxx indices show. More worryingly, even as bank stocks have climbed, with the KBW index gaining 54% from its lows, U.S. senior bank bond spreads remain at their widest levels since Lehman Brothers collapsed.
Those bonds are "pricing in unheard of and devastating levels of default" and a huge influx of speculative cash to those assets has failed to spark a rally. Lots of sellers are still bailing out of corporate debt. Until they stop, any near-term strength in stocks can't be totally trusted. We may be finally getting past the point where "sell the rally" rules the day in stocks, but we aren't yet back to full-bore buying.