What To Make Of The Dow’s Recent Rally

In the absence of any major macroeconomic storyline, U.S. stock markets meandered higher today and, by day’s end, posted some relatively impressive increases.  On the day, the Dow Jones Industrial Average (INDEX: ^DJI  ) popped 52 points, or 0.4%. Following suit, both the S&P 500 and the Nasdaq also rose, posting gains of 0.5% and 0.9%, respectively.  The market’s oft-cited "fear gauge," or the VIX (INDEX: ^VIX  ) , stayed in check, only ticking up slightly by 0.3%. The day’s positive close marked the third consecutive gain for U.S. markets.

However, don’t let the headlines fool you. The recent bullishness is about as ephemeral as it gets.  Over the last month alone, all three major U.S. indexes have notched around 3% gains, with each index now sitting firmly in positive territory for the year, despite a largely downbeat global growth profile.  Here are a few data points to illustrate the point:

  • Unemployment is now rising.  After trending down since July of last year, the unemployment rate in the U.S. bottomed in April, reaching 8.1%, and recently touched 8.3% after July’s hiring data. Although no one ever questioned that a domestic recovery would be slow, signs of deterioration aren’t usually the kind of fuel that rallies desire. 
  • Europe is expected to slip into recession, as well. The IMF expects the eurozone’s economic activity to decline by 0.3% on the year, with Spain and Italy contracting 1.5% and 1.9%, respectively.  And, despite recent euphoria surrounding Spain’s possible request of a bailout from the ECB/EFSF, this margin for error remains brutally thin.
  • Emerging markets, the real only sole source of hope, are also slowing.  In its most recent round of projections, the IMF lowered its growth estimates for the two major emerging markets, China and India, by 0.2% and 0.7%. 

Investors are in a treacherous position, which itself is worth remembering, maybe more than they realize.  Consider this: The short interest on the S&P 500, despite sitting almost 12% higher on the year, is at its highest levels in five years. Investors might not be buying this month’s rally.  Caution might not be a bad idea right now.

Around The Markets
It’s not all doom and gloom.  Despite the challenging situation in the broad economy, we did see some signs of life from a few companies around the market.  Shares of satellite radio player Sirius XM (Nasdaq: SIRI  ) rose 4.6% on the day, after the company reported impressive quarterly results.  In its second quarter, the company grew subscribers by 622,000, revenue by 13%, and free cash flow by 39%.  Despite the ongoing overhang from the attempts of its largest shareholder, Liberty Media (Nasdaq: LMCA  ) , to acquire the rest of Sirius’ outstanding shares, the company still raised its full-year guidance.

Similarly, shares of market pinata Chesapeake Energy (NYSE: CHK  ) rose 9.4% today on better-than-expected earnings and asset sale plans.  America’s second largest natural gas producer notched the highest profit in the company’s history.  In order to address its potential funding shortfall, the company upped its target for minimum levels of capital it needs to raise, from $11.5 billion to $13 billion, more than half of which should occur by the end of September.  Today’s rally leaves Chesapeake shares still down nearly 20% on the year.

Foolish Bottom Line
The day-to-day noise swirling around the market can grow borderline deafening.  Focusing on companies that are chugging along healthily, despite the weak consumer environment, is a great place to start your research process. One of the Fool’s oldest analysts recently profiled one of today’s stars, Sirius XM, in the Fool’s most recent premium report. To get the entire skinny on what makes Sirius tick and 12 months of free updates, just click here to grab your copy today. 


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