The Week ahead

Limited Technical Rally

The bout of Enronitis has been very pronounced but seems to be lacking something important: A trend.

The misdeeds of one company does not a market make. Enron broke the law, engaged in envelope pushing accounting practices and paid the price for it. Does that mean General Electric is next?

I kind of doubt it. Just because General Electric has a complicated structure does not mean they play games with accounting. General Electric has provided strong percentage growth for years. When the economy slows other lines of business pick up the slack. Yes, GE Financial is complicated in structure but that represents the fact that they acquired so many companies.

I expect a small market rally for the following reasons. First, inventory is still dropping in the economy. That can not continue. Either companies will start hiring workers and making products or they will run out of product to sell. The rest of the economic calendar seems to show good progress. The December fall in consumer debt could be viewed as worrisome, but it shows that there is room for expansion.

The other reason I expect a small rally is technical. The entire stock market sold off, largely as a result of the Enron scandal. Yet as long as no other companies collapse for that reason the effect can not continue. Even abused Tyco International showed it has a ton of cash on hand and rebounded late last week.

Stocks are a little oversold and should correct technically.

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Shmuel Protter
investmenttool.com