5 Things America Needs for a True Bull Market

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In about two months, the Dow has see-sawed in a range of roughly 1,300 points — 10,400 to 11,700. That’s not a crazy spectrum, but the way the Dow has performed day to day certainly warrants the description “insane.”

Consider this: In the past 50 trading days, dating back to Aug. 8 when the Dow Jones gave up more than 600 points for its worst loss since the gloom and doom of the financial crisis, we have seen a 100-point move in the Dow 34 times. That’s 70% of the time!

It used to be that big moves were noteworthy on Wall Street. Now it’s the norm, and investors better have the stomach for volatility.

Day traders can make a mint riding the sentiment up one day and down the next. But buy-and-hold investors and folks watching their IRAs and retirement funds have nothing but questions. Is a rally sustainable after this volatility gets washed out? Is the stock market just fighting against another steep and inevitable decline?

There are no easy answers, and things always can change on a dime based on news from Europe or the latest mayhem in the American financial sector. But this much is clear: A rally on Wall Street is never going to stick unless we see these five important developments:

Bank Earnings Need to Improve

Just look at the headlines from the past few days. JPMorgan Chase (NYSE:JPM) saw third-quarter earnings slip 3.5% thanks to higher expenses. Wells Fargo‘s (NYSE:WFC) third-quarter earnings missed expectations as the financial stock’s loan business didn’t grow fast enough. A massive one-time accounting gain allowed Citigroup (NYSE:C) to eke out its seventh consecutive quarterly profit, but subtract a paper gain of $1.9 billion related to the risk of its debt, and the $2.2 billion in profits shrinks to a very unimpressive number.

You can blame some of the earnings woes on persistent troubles with bad mortgages, but the bottom line is that banks’ core business of consumer and business lending has failed to prop up the bottom line. The financial sector and bank loans are intrinsically linked to the success or failure of the broader economy. No loans means no growth at banks, and subsequently no growth for the economy or the stock market.

Volume Needs to Pick up on Wall Street

Here are some stats for you: Since May 1 — when the volatility really started to heat up — trading has lagged last year’s volume significantly. Volume of the Dow Jones components is pacing behind 2010 numbers by an average of 327 million shares a day (median 323 million). And if you take out a brisk September that likely was prompted by a scramble among institutional investors to finish Q3 with respectable numbers, the Dow volume is even uglier.

From May to August, the average number of shares traded for the index was 750 million behind the same period in 2010 (median 715 million). No wonder we are seeing triple-digit swings in the Dow like clockwork. When volume is so low, a little bit of panic or enthusiasm is contagious. You simply can’t build a sustainable rally when the market is subject to the whims of investor sentiment — and that’s the reality of a low-volume rally.

Some Kind of Sovereign Debt Solution

Look at most “mainstream” financial news sites and you’ll see the world is on the edge of its seat over the European debt crisis. Every time Merkel or Sarkozy sneeze into their sleeve, it’s time for a selloff or rampant rally. Even Slovakia can cause a hubbub on Wall Street, for Pete’s sake! This is less a function of how important Europe is to the global economy — though it admittedly is a big issue to work out — and more a reflection of the fact that Europe is the embodiment of investor uncertainty right now.

Just wait until the congressional supercommittee rolls up its sleeves in November before the Thanksgiving deadline for an American debt solution, and you’ll see the same kind of drama playing out again, I’m sure. The problem is that investors have no idea which way to turn, and the euro debt crisis (and American debt crisis, too) are constant reminders that it could go either way. Until these big “unknowns” are taken off the table, it’s going to be hard for investors to build a sustainable rally.

Some Kind of Bottom in Housing

After the immediate and global concerns of sovereign debt, the biggest drag on individual household wealth remains the battered housing market. Those planning for retirement have a hard time feeling comfortable about the stock market or investing when they constantly are reminded that their house could be worth even less tomorrow than it is today.

It’s impossible, of course, to retain peak valuations caused by the subprime mortgage bubble — and we shouldn’t wish for such a rebound, since it clearly would be unsustainable. However, some stability in the housing sector would go a long way to soothing investors. Knowing we’ve found a floor will allow folks to spend their energy (and retirement funds) on other financial issues.

Some Kind of Hope for Unemployment

The market has been gyrating all over the place, but jobless numbers have been stubbornly constant. In October 2009, the unemployment rate was at 10.1% nationwide. It’s now at 9.1% after hitting a low of 8.8% earlier this year. That’s a pretty tight range — and a pretty disappointing labor market.

As with housing, it’s unrealistic to expect us to get back to under 5% unemployment anytime in the next decade without some bubble-inflating schemes that will burn us in the end. But even the “low” of 8.8 was unacceptable, and the lack of movement in the past few months does not inspire confidence. Something as small as a 0.2- to 0.3-percentage-point decline in three consecutive months would inspire a heap of confidence.

The flip side of that, of course, is that stagnant jobless numbers are almost as bad as rising unemployment — because the status quo hardly is anything for investors and consumers to celebrate.

Yes, each one of these issues individually are a tall order. And all five of them collectively seem like quite a wish list. But that’s the point. Investors need to be realistic about the current economic environment.

If you’re a day trader, feel free to ride the gut-wrenching volatility and try to cash in on the right side of a swing trade. If you’re a buy-and-hold type, you can try to find value buys during the selloffs or hide out in dividend stocks — but admit to yourself that the prospect of a sustained rally across the next 12 to 24 months could be nothing but a pipe dream as long as these problems remain unresolved.

Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the aforementioned stocks. Write him at editor@investorplace.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.


Article printed from InvestorPlace Media, https://investorplace.com/2011/10/5-things-america-needs-for-a-true-bull-market/.

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