A Welcome Respite

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The market saw its strongest rallies in months this week, soaring more than 11 percent in just three days. Even better, volume has been heavy on the big up-days and breadth has been solid. These facts suggest broad participation and institutional support for the move.

This rally could continue for some time longer, perhaps extending well into April. After all, the market was, and is, extremely oversold after weeks of seemingly endless selling. But I'm far from convinced that this is the beginning of a new bull market, and I suspect we'll retest recent lows later on this year.

The main reason for my suspicion is the leadership of the recent rally. Check out my chart below for a closer look.

Source: Bloomberg

This chart shows the performance of all 10 S&P 500 economic sectors over the past five days. As you can see, the biggest leaders of the recent move are financials and industrials, the two groups that have been hit hardest this year. The S&P 500 Financials Index is up by nearly a third in just one week.

The proximate cause for the rally in financials is some positive comments out of both Citigroup (NYSE: C) and Bank of America (NYSE: BAC); both companies claim to be generating operating profits so far this year. But two months' worth of profits doesn't mean these banks have sufficient capital to return to a healthy state. More likely, traders simply seized on this tidbit of positive news as a catalyst for a short-term pop off deeply oversold levels.

Much the same can be said for the industrials. One of the biggest movers in the group is General Electric (NYSE: GE); the stock saw its credit rating downgraded this week from AAA to a still healthy AA+. But this move was widely expected; in fact, some analysts expected an even deeper cut. The market's reaction was a classic case of the old Wall Street axiom "Buy the rumor, sell the news" in reverse--in other words, the market tends to price in news long before it actually comes to pass.

The market also seized on a few bits of decent economic data this week. Retail sales released this week came in higher than expected, suggesting at least temporary stabilization in US consumer spending habits. And continued strong growth in Chinese lending activity suggests that Chinese banks are actively supporting the government's efforts to stimulate the economy. Our in-house Asia expert, Yiannis Mostrous, and I discussed he trends for the Chinese economy at some depth during a video available on At These Levels.

But two pieces of data don't make a trend; as regular readers of PMW know, I'm watching the US Index of Leading Economic Indicators for signs of a more meaningful trend. As I pointed out in the Feb. 20, 2009 issue, It's Still the Economy, the only indicators showing any signs of strength are money supply and interest rate spreads. And the weakened credit market continues to blunt the efficacy of monetary policy.

I'm encouraged, however, by the fact that despite the S&P's weak start to the year, far fewer stocks on the New York Stock Exchange (NYSE) broke down to new 52-week lows. I've been writing about this indicator on an ongoing basis over on At These Levels. See the chart below for a closer look.

Source: StockCharts.com

Note that only around 800 stocks on the NYSE hit 52-week lows during the heart of the early March selling compared to more than 1,400 in November and well over 2,400 in October. This indicates that there remain some pockets of strength, or at least relative strength, in an otherwise lackluster market.

In Personal Finance, I continue to recommend the same basic strategy: Own a diversified mix of recession-resistant growth stocks and beaten-down names in more cyclical industries that stand to benefit handsomely in the early stages of any economic recovery. My favorite groups remain consumer staples, health care and for-profit education stocks as defensive plays and energy and technology stocks as plays on the coming turn.

A Refinery Tour

I made a trip to the San Francisco Bay Area this week for a talk with a local chapter of the American Association of Individual Investors (AAII) and a detailed tour of Chevron's (NYSE: CVX) refining facility in Richmond, Calif., led by one of the company's project engineers.

The refinery, located roughly 25 miles outside San Francisco, covers nearly 3,000 acres. In fact, Richmond is the largest refinery in the San Francisco Bay Area, with total throughput capacity of 240,000 barrels of oil per day and is Chevron's third-largest wholly owned facility. It's also among the oldest in the country--it opened more than a century ago, in 1902. My tour guide patiently and enthusiastically explained the complex web of pipelines and equipment.

Although I'm familiar with the basic refining process, I'd never toured a refinery of that size; the sheer scale of the operation is awe inspiring. It's a city unto itself, complete with its own fire department, water and sewage treatment facilities and a natural gas-fired power plant.

These aren't small facilities. Chevron's fire department is set up to aid the local Richmond department with handling fires throughout the city. And I found the water treatment facility particularly fascinating. Waste water collected from all over the refinery and surrounding lands is treated in several different ponds. One pond is equipped with bacteria that eat harmful chemicals that might remain in the water; the bacteria are kept active by constantly bubbling oxygen into the water.