Weekly Stock Market Re-Cap

U.S. Stocks closed the week with significant losses on Friday, which sent the Nasdaq Composite, and a few other averages, to their first monthly losses since this bull run began in March. Based upon the market action of the past couple of weeks, it is clear we have entered correction mode. The character of the stock market has clearly changed. For instance, early morning gains have turned into late day losses. That is not characteristic of a market that will be trading higher. Also, individual stocks have taken hits AFTER reporting earnings above expectations.

I would add that it has seemed to me that most of the commentators on CNBC have been quite bullish heading into the last couple of weeks. They all point to a continued recovery in business inventories and continued stimulus spending as keys to an economic recovery, which should continue to boost the stock market. I continue to ask where the consumer spending will come from considering the fact that the residential real estate market is still weak, and with an unemployment rate that likely will head above 10% in the foreseeable future.

I have noted economist after economist suggesting that there is indeed a recovery going on in residential real estate. As such, this past week's report that new home sales were down in the latest month was a shocker to them. In my own neighborhood, I have seen one home sit on the market for over a year. Indeed, it is a flawed home, but now is priced well below its purchase price by the current owner four years ago. I have seen other homes in the neighborhood sit on the market for several months, much longer than normal.

I have been a commercial real estate appraiser for over 20 years. One recent study I conducted in my own area here in Harrisburg, Pennsylvania indicates that commercial real estate transactions are down about 40% since 2007. Capitalization rates have risen dramatically. Vacancy rates have been on the rise, and this is pressuring rental rates. It is clear that many properties purchased in the 2006-2008 period are under water in many locations around the country. Therefore, there will be another shoe to drop for this economy.

I believe this stock market rally has been quite bogus. I am sure that in March, we hit a significant low, and the market sold off more than it should have. But, a rally of nearly 60% since then seems unwarranted considering the headwinds we still face. Huge government deficits and an administration that seems to want to add more to them in spite of their words. An extremely weak Dollar. Oil prices back over $75 heading into Winter. A healthcare bill likely to add more of a burden to businesses, along with a push for a cap and trade bill on energy.

In any event, the market is getting quite volatile again. I think there is more room to the downside, but short sellers need to be very careful and nimble.

Scott Cole www.bestdaytradingstocks.com