No End to the Trend

by Zubin Driver
August 11, 2009

Bulls enjoyed yet another week of strength to begin the month of August, with markets rallying sharply Friday in response to stronger-than-expected US jobs data. Since the brief correction in early July, US markets have consistently marched to new highs in a low volume, summer trading environment. For obvious reasons, a number of commentators and pundits have been calling for a correction that is taking a long time to arrive. But arrive it will at some point, and becoming long at these levels seems ill advised.

US Nonfarm Payrolls: another sign points to recession's end

Last Friday, US employment numbers were released for July, showing losses from June levels of 'only' 247,000 jobs, the least since August 2008. Consensus expectations were for a loss of 325,000 jobs, so this number significantly beat predictions. January saw the worst job losses at around 750,000, over 3 times last month's losses. Revisions to June's jobs data also showed less losses than originally reported in July, so overall, the report pointed towards an improving trend in the realm of employment.

Taken along with other economic indicators such as equity markets, commodity prices, increasing factory orders, and consumer and producer price indexes and sentiment, the picture of improvement seems to be broadening across multiple areas in the economy. Though a return to growth will likely be sluggish, the market's strong recent performance is due to the fact that no matter how slow the recovery, any growth is much better than the black hole of '08 into which all bids violently disappeared.

When does the trend stop being your friend?

'Tis a classic saying that all market participants have heard, 'the trend is your friend.' Thus, when a powerful trend is in place, such as that which began to the upside in March, its ability to develop what seems like self-perpetuating momentum, capable of lasting far longer than appears justified based on pure fundamentals, can astound everyone. Some investors get badly hurt in this process by trying to predict the turn in the trend too early. All the way down last fall people were trying to bottom fish while stocks kept falling, while conversely, this spring and summer has doled out punishment to investors who are short. The famous economist, Keynes, has a maxim for this phenomenon: 'markets can remain irrational far longer than you or I can remain solvent.'

When a trend does conclude though, direction can change fast; how much longer will the new highs last?

Best regards,
Zubin

Zubin Driver
Investment Advisor
(W) 604 643-7608 / (F) 604 643-7606
Email: zubin_driver@canaccord.com

Canaccord Capital Corporation
Attention: Zubin Driver
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OFFICES IN MAJOR CENTRES ACROSS CANADA. MEMBER OF ALL CANADIAN STOCK EXCHANGES AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA. MEMBER CANADIAN INVESTOR PROTECTION FUND (CIPF).