Say Goodbye To The Recession

The initial estimate of Q3 GDP was released this morning, and showed that the US economy bounced back at a rate of +3.5%. This figure is better than the 3.2% consensus estimate, and well above the 2.7% whisper number that Goldman's economist floated yesterday, that may have weighed on the market a bit.

This was the first positive GDP reading since Q208, after a string of four consecutive negative readings. If you're being technical, I believe this marks the official end of the recession, but the NBER will come out and make that determination sometime down the road, probably when it doesn't really matter to most people anymore, lol.

I have been writing about the economic bottom since March, when the stock market bottomed and I suggested that although the economic numbers would still be negative, they would begin to get "less bad" on their way to eventually turning positive. That subtle rate of change was the catalyst behind the big stock rally, and I think the magnitude of said rally could indicate that the economic rebound will indeed turn out to be stronger than most expect.

The naysayers will say that too much of the GDP bounce came from govt. assistance, in the form of 'Cash for Clunkers' and the homebuyer tax credits. This may be true, but that doesn't mean that the economic rebound can't still become self-sustaining post stimulus. Inventories were drawn down again in Q3, and when inventories actually start to get built back up, it will provide a strong boost to the economy.

The ECRI has had a very good track record of calls on the economy. Right now, their Weekly Leading Index is just off its highs, and indicating that the economic recovery is going to be strong. They also said that the odds of a double-dip are low right now. I'll bet on the ECRI versus the Wall St. economists.

The dollar is lower today, after its own 5-day rally. This is boosting stocks and commodities. Oil is up $1.50 to $79, while gold is up over $7 to $1038. The materials sector is the biggest winner so far today, while defensive utilities are lagging.

Asian markets were lower overnight, despite the IMF raising its economic growth forecast for the Asian economies; the 10-year yield is higher to 3.48%; and the VIX is -8.3% lower to 25.59.

Trading comment: I put some money to work on the long-side yesterday, after a 4-day slide that brought the market deep into oversold territory (oscillators). This also coincided with month-end, so the odds of a bounce were fairly high.

That said, I would like to see what this bounce is made of before I commit too much. If this is simply a low-volume bounce, with many leading stocks only able to make lower highs vs. last week, then this correction could have more to go. I do not think there is huge downside risk, sometimes corrections just need more time to run their course.