The Market's Still in Break Mode

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Stocks finished last week mixed after digesting a flurry of economic data. The Dow declined for the second straight week. For the week ended June 26:

Dow: Down 1.2% to 8438.39
S&P 500: Down 0.3% to 918.9
Nasdaq: Up 0.6% to 1838.22

The run in stocks the last three months continued to flounder as optimism surrounding a stabilizing economy gave way to the realization that recovery could be tepid. Case in point, the savings rate jumped to an annual rate of $768.8 billion, the highest level on record since 1959. While it's good that consumers are being more prudent, it also means they aren't spending -- which leads to short-term turbulence in a consumer-led economy. Adding to the mixed bag of data was a bigger-than-anticipated increase in continuing jobless claims, while durable goods orders unexpectedly climbed in May -- a positive sign for an easing recession. The outlook for global growth this year was also downgraded by the World Bank.

Additionally, as the end of the second quarter is nearing, "window dressing" is beginning, which traditionally happens toward the end of a quarter when portfolio managers will buy or sell certain stocks to improve the appearance of their portfolio's performance for investors.

Companies provide specific examples of the status of the economy
In company specific news, Palm (Nasdaq: PALM) said its fourth-quarter loss widened from a year ago. However, the handset maker's Pre smartphone, which exceeded expectations, launched after the quarter's end. Additionally, Palm said it expects to be cash-flow positive by the end of the calendar year -- a nice stride back to profitability as the company tries to reestablish itself.

Software company Oracle (Nasdaq: ORCL) posted a 7.2% decline in fiscal fourth-quarter earnings, hurt by the strong U.S. dollar (half of its sales originate from overseas.) A 13% decline in new software, as businesses delayed purchases, also contributed. Oracle is considered a bellwether for business spending. However, the company, which is weathering the downturn well and is gaining market share, issued upbeat earnings guidance inline to above the Street.

On the home front …
KB Home (NYSE: KBH) posted a narrower second-quarter loss from a year ago while revenue plunged 40%. New home orders were down 31% from a year ago. The homebuilder said it's starting to see signs that "negative housing trends may be moderating at a local and national level."

Lennar (NYSE: LEN), one of the nation's largest homebuilders, posted a wider-than-expected second-quarter loss as sales fell 21% and the average price of homes sold slipped 8%. The good news was that the homebuilder saw a sequential increase in new home sales from the first quarter due to lower rates and government incentives (and the seasonality of housing sales).

Both KB Home and Lennar said that while lower interest rates and an improvement in consumer confidence were helping, rising unemployment, increased foreclosures and tighter credit conditions could dampen demand and make predicting an official turn in the housing market cumbersome.

While it's good news that both homebuilders saw a sequential increase in home sales, both also said that average home prices continue to fall. Remember we're not getting out of this recession until housing prices stabilize. For most consumers, their biggest asset is their house. Until people can feel comfortable about their housing situation from both a financial and a psychological standpoint, recovery will not ensue to any great degree, as consumers won't spend.  

What to watch for this week and the second half of the year
This week brings the end of the month, the second quarter, and the first half of the year. It will also be a shortened trading week ahead of the July 4 holiday as markets will be closed on Friday. To that end, volume could be light. It will be a heavy week on the economic data front. The S&P/Case-Shiller Home Price index is out on Tuesday. This will be an important data point in that prices need to stabilize before we can recover from this recession. Also out this week are the ISM manufacturing index for June, construction spending, and the major data point for the week will be the unemployment number for the month of June, which comes out Thursday.

Since we will be starting the third quarter and the second half of the year, investors will be paying close attention to second-quarter reports. They'll be paying closer attention to revenues to see if companies have been able to increase their top lines. Cost cutting to shore up their bottom lines may no longer be enough to excite investors to bid stock prices higher.

For related Foolishness:

• A Fool's Look Back  
• The Fool's Look Ahead  
• Housing: Close to a Bottom?