The most amusingly-obvious (yet also irritating) story came from U.S. News & World Report … “Home Builders Not Driving Economic Recovery”.

Really? Thanks for the warning.

There’s little doubt that homebuilders aren’t driving the recovery. The question is, are they even participating in the recovery? So far it seems as if they’re not - at least not in a meaningful way. Unfortunately, none of the recent news has quantified where homebuilders are now, versus where they were then, versus where they should be. That, however, comes as no real surprise, as that kind of journalism requires actual research beyond the latest economic report.

Since no other media members seem willing to paint a ‘big picture’ of the homebuilder plight, we will.

First Things First

A final good/bad assessment of the industry is below, but a couple of explanations are in order to explain the “why” of our digging before we get into the “what”. Let’s all first understand that:

• We know the peak of the real estate bubble was in 2005, but we need to know the relative size of the bubble before we start drawing comparisons to it…. something the media has yet to describe.
• We need to define an earnings-based ‘norm’ for homebuilder stocks if we’re going to say they’re overvalued or undervalued now.
• We need to understand the correlation between earnings and capacity of demand; we can’t reclaim 2005’s earnings levels on 2008’s demand for new homes.

See where this is going? Great. Then let’s get on with it.

Valuation

At first glance all seems like it’s getting back to normal for the homebuilders. Though there are still plenty of them struggling, and presumably some of them won’t survive, we also see a few of these stocks limping their way back into profitability. Hope at last?

The ‘value’ argument lies in their current and forward-looking price/earnings ratio. Meritage Homes Corp. (NYSE:MTH), for instance, boasts a trailing P/E of 17.6, while NVR Inc. (NYSE:NVR) is priced at 17.08 times earnings over the last twelve months. Their projected (2011) price/earnings ratios are in the same high-teen area, as is D.R. Horton (NYSE:DHI) with a forecasted (2011) P/E of 19.5.

While not exactly on the cheap side, the figures are at least palatable, eh?

Well, no, not really. Were it any other industry we could say yes. For homebuilders though, that’s nearly four times the average pre-bubble (pre-2006) P/E of 5.17. (And yes, you read that right - the ‘normal’ price/earnings ratio range for homebuilders is between the number five the number six.)

How can it be so? There are a handful of reasons this group has traditionally been priced at the extreme low end of ‘reasonable’, most of which are beyond the scope of our discussion today. At the heart of the matter, however, is the reality of traditionally slim margins… in the 3% to 6% range.

Barring some sort of bizarre miracle, the normal profit margins in homebuilding aren’t suddenly going to improve, which in turns means investors are paying far more for profitability here than they ever have before - and they’re not being paid for the risk they’re assuming.

Strike one.

Earnings

OK, fine, homebuilder stocks are expensive right now. But, what if these companies could at least start making a fraction of the kind of money they were making before the bubble started to deflate in 2006?

Well, that’s actually part of the problem…. they are doing much better now than they were doing three years ago, and it’s still only a fraction of the kind of money being made in 2005. See, 2005 wasn’t just a very good year for homebuilding - it was stunningly good year, on the same scale as the tech bubble in 1999 (though at least the homebuilders performed an actual service and did actually make real money for a short time).

The nearby chart puts it all into perspective. It shows the average earnings-per-share for the top eight - by market cap - stocks in the industry going all the way back to 2000. Between then and 2003, homebuilder earnings nearly doubled.  By 2007 though, the losses being taken on an annual basis were bigger than the annual gains being made just four years earlier. In fact, in the aggregate, the industry is still losing money.

A few bad apples spoiling it for everybody? Nope, and just to prove it, we also added an earnings trend line just for the companies that were on pace to be profitable this year and next year (NVR, D.R. Horton, Pulte, Lennar, Standard Pacific). Even these ‘good’ ones are still well off their peak income levels. They’ll have to quintuple 2011’s expected earnings to match 2003’s records. The industry as a whole will need to do about ten times better than its on pace to do in 2010 to revisit 2003’s record earnings levels.

Yes, things are improving, but when you start taking about earning being multiplied by a factor of five, ten, or more, it’s time for a reality check. That’s just not in the cards for years to come.

Strike two.

There’s a Limit

While the recession has been named as the bulk of the problem with homebuilding, there’s another, largely unspoken, reality that’s not been addressed ….and it’s a much bigger problem the industry has been and will contend with forever - houses aren’t consumables.

When you run out of food, you buy more. When your car wears out, you buy another one. You don’t pay for cable televisions once and get it forever; you have to keep paying the bull to keep getting the service.

A house, however, is (for the most part) a one-time sale, and the demand for new homes is finite, as is the population.

See the illogical nature of a ‘high growth’ homebuilding industry? The more houses that are built now, the less we’ll need built later. And, considering the inordinate number of houses built between 2001 and 2006, we may have adequate supply to last us for many, many more years.

That’s a slightly different message that what the media is spewing. They’re suggesting the huge supply of real estate is the result of would-be buyers being unable to get a loan. We’re saying the huge supply of real estate is just the result of a huge supply of real estate, and even an easier-credit environment can’t do a lot to solve that problem.

Though there is some data in support of the idea, conclusional cause/effect data is tough to muster. On the other hand, the media has only presumed that crimped credit is the underlying reason for the housing glut. Either way, housing demand is finite by default, and the closer that demand is to being 100% met, the worse it gets for new home builders.

Strike three.

Bottom Line

Is there anything earth-shattering or surprising about these numbers? Probably not, though it’s always better to talk specifics when money is at stake….. something the media hasn’t done yet.

Regardless, it’s an important discussion to have, as the chatter surrounding a homebuilder recovery has become louder and more frequent. You may want to consider the facts presented above before jumping to any conclusions. Homebuilding stocks’ best potential results going forward are still apt top pale in comparison to the sector’s past, even if these companies do everything right.

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1. The late rally on Friday is a huge testament to the ultimate conviction of the market. Buying a stock on a Tuesday at 11 am EST is one thing, as you’ve got five more hours that day to change your mind, and you’ve still got three full days after that to shed it if need be. But to choose to be long the market on a Friday afternoon (when you’re stuck with it for two whole days) is a major, and bold, commitment.

2. We just saw our fifth straight close back above the 200-day moving average line (green), and the bulls went well out of their way on Friday to score that fifth one.

3. The VIX is on the verge of breaking to new multi-month lows; the line in the sand is 21.73.

The bears are saying….

1. While the SPX may have cleared the 200-day moving average, the real test lies ahead, around 1125. That’s where the 100-day moving average line (gray) is, as well as the recent peak level. To make matters more alarming, the 100-day line was also lined up with that ceiling when the market peaked at it in June. Translation? Major hurdle.

2. Even if the 1125-ish area is surpassed, the upper Bollinger band lies dead ahead at 1141. (The longer-term Bollinger bands have been surprisingly important support, resistance, and reversal levels over the last several months.)

3. The market may be going up, but there’s a serious lack of volume behind the move. As such, this impressive move is also apt to be an errant one, and corrected soon.

It’s not difficult at all to realize we are indeed at an inflection point. It may take a couple of days for the market’s true undertow to be realized, but it shouldn’t take much longer than that - one side’s going to have to commit sooner than later. The discussions above point to the items you need to be watching most closely on charts.

S&P 500

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Utilities and telecom are still out on front, though utilities stocks eased back a bit later in the week, allowing telecom to move ahead for the last three months. Both were and still are ‘must haves’, however, so the shake-up is a little irrelevant.

At the bottom of the pile you’ll find energy is still at the bottom. Though it remains a laggard, our contention remains that these stocks - selectively - are also tremendous opportunities right now.

The most noteworthy (and actionable) leadership switch-up came from the sectors in the middle of the pack. Basic materials, which had been weak coming out of the April/May pullback, saw big progress last week that pushed it ahead of a few other arenas. Yet, the group still has room to move. Coupled with its new momentum, the materials stocks are also quickly becoming ‘must haves’.

Not that one week makes or breaks a trend, but it should be noted that the current performance ranking started to materialize in early June when the market first started to offer a glimmer of rebound hopes. So what? There are two points to make……(1) such trends do persist, and (2) they can be identified, if you just look for them.

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While a rally out of the summer doldrums still isn’t a foregone conclusion, the sector-leadership trends we’re seeing develop now are apt to be early omens of what’s in store if the bulls can just keep getting traction.

Sector Rank

For those of you who are a little more visual, the percentage-change comparison chart may better depict how these sector trends are shaping up since the peak on April 23rd.

Sector Comparison

Style Performance

There’s little confusion about where the strength was last week - small caps dominated, mid caps were in the middle, and large caps lagged…. though a 3.5% ‘lag’ is nothing to be ashamed of. While market cap seemed to be more of a matter than style last week, growth is still proving to be more fruitful than value in the recent bigger picture.

Style Rank

And as we did with the sectors, here’s the visual comparison of returns for the major market cap/style groups, since the April 23rd top. It’s here we can see how well growth stocks are coming out of the April/May funk.

Style Comparison

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The good news is….

• The S&P 500 Index has crossed back above the 50-day moving average line (purple), which had been a resistance line with the bullishness from three weeks ago.
• The VIX is trending lower. Moreover, the VIX’s lower Bollinger band (at 20.13) is now pointed lower, meaning it’s less likely to act as a deflective floor. Rather, it just may gently catch the VIX and slowly guide it lower.

The bad news is…

• The S&P 500 is on a crash course for the 200-day moving average line (black) at 1113.4, and the upper 50-day Bollinger band at 1141. Either could halt or slow the advance, and if they combine at the same area, they could be become doubly-tough to cross.
• The VIX, though trending lower, seems to be hitting a minor floor around 23.0 (dashed)

While from a fundamental point of view the recent gains and more upside are merited, from a technical point of view we see some roadblocks in the near future. We’re getting close to the inflection point.

S&P 500

Since the NASDAQ’s pros and cons are similar to the S&P 500’s, we’re not going to dive into the same detail. We’ll just point out that the NASDAQ is - unlike the S&P 500 - above its 200-day moving average (black). It’s still going to tangle with its upper Bollinger band though, currently around 2363, but falling fast.

The VXN is also pointed lower… barely. It’s floor (dashed) seems to be just a hair above 23.00 as well, though we’ve not necessarily seen any real effort to push up and off that line.

As was the case with the SPX and the VIX, the NASDAQ Composite and the VXN suggest there’s a little more room for upside, but real tests are on the horizon.

NASDAQ Composite

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Other than that though, real estate seems to be suffering. The National Homebuilder’s Index (a confidence index, mostly) fell to multi-month lows, housing starts were down by even more than expected, and existing home sales fell by about 5%.

New unemployment claims bounced back up to 464K, right where they’ve been hovering for weeks, and undoing an encouraging drop in the prior week. Ongoing claims did make a significant move lower to 4.48 million.

Economic Calendar

There’s a lot more in store for the coming week. New homes sales will be unveiled on Monday, with the Case-Shiller Index being updated in Tuesday; both are forecasted to show modest improvements. The same goes for Wednesday’s durable orders (even if the bulk of the improvement is aircraft sales).

On the confidence front, look for the Conference Board’s Consumer confidence figure - which plunged like a rock last month - to be released on Tuesday, while the University of Michigan Sentiment index will be updated on Friday. The former is expected to move down, while the latter is anticipated to go up.

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So what happened in the meantime to turn investors back on again? Economy? No, the new unemployment claims figure is back in the ‘too high’ area, and real estate appears to be crumbling again. Good earnings news? No. Though we saw plenty of encouraging surprises, we saw a fair number of letdowns too, from Yahoo, Google, and others. (In terms of beats/misses, this earnings season is about the same as all the rest.) Cheaper oil? No, if anything, the brewing storm in the gulf is going to tighten the supply for a few days, and push prices higher. Confidence in the federal government? No, Obama’s polling at near-record unpopularity, and the bulk of his decisions are considered ‘business unfriendly’.

So what gives? Here’s why the market rallied so well last week, and for that matter, why it’s up 8.8% over the last three weeks….. because investors were just ready to buy, choosing to see more value in stocks than liability.

Don’t laugh - it’s the truth. Nothing else that is ’supposed to’ drive stock prices changed during that time. Investors just decided it was time for a rally.

Some of you will believe that, some of you won’t, and some of you will consider the idea over time before making a decision. Whatever group you fall into though, you should also stew on something not that we said, but something Benjamin Graham (the founding father of the “why the market does what it does” theories) wrote long ago….

In the short-term, stocks are a voting machine and in the long-term, stocks are a weighing machine.

The short-term ‘votes’ are swayed by the ebb and flow between fear and greed. Since they are always changing though (largely due to factors that actually have little effect on the market), stocks are rarely pointed in the same direction for very long.

What being ‘weighed’ in the long-term is earnings. Eventually, even if only temporarily, stocks are valued appropriately. This may only occur a few times per year, if that, but it’s why long-term ‘buy and hold’ investors are willing to hang on, even when the environment is testing their confidence.

Or to put all of this succinctly, the April/June pullback was the result of overbaked bearishness (fear), which stemmed from excessive confidence (greed) that swelled up in February and March.

Undoubtedly we’ll see greed/confidence peak again in the foreseeable future, at which time stocks will be back to an overvalued status. Guess what’s going to happen then…. another pullback.

All those up and down swings? Those are the ‘votes’ Graham was talking about. With each of those swings, however, the S&P 500 has or will hit the 1150-ish area, which - based on earnings - is what we see as an appropriate valuation for the broad market. Even if it’s only there for a short time, getting there at all validates Graham’s idea that over the long haul, the market does get it right.

Yes, the earnings outlook is always changing, but never to the degree that all these wild swings in stock values imply. True earnings-based investors only need to look at the market and the earnings data on a weekly basis, and really, a mere monthly view may be adequate. All the gyration in the meantime is just a lot of fluff and volatility, mostly induced by the media that preaches a ‘take action now’ mentality for with every shred of news.

We’ve said this before, but in light of everything discussed above, we’ll repeat our important message today - investors who can distinguish between long-term trends and short-term trends, and trade accordingly, are equipped to outperform amateurs and professionals alike. That’s why we focus so much on our short-term timing tools like breadth and depth, and continually look at the market’s overall P/E ratio.

Anyway, as far as the market is concerned….

Given the current bullish momentum, and the growing degree of optimism because of the recent gain, we’re looking for stocks to continue upward. In an ironic twist though, by the time the S&P 500 reaches levels that are high enough to convince everyone that the market is in a recovery mode, the index will also hit a couple of major headwinds.

The first headwind is the potential resistance at the 200-day moving average line (green), currently at 1113.

The second headwind is the upper 50-day Bollinger band, currently at 1140, but falling. By the time the S&P 500 hits the 200-day average line’s area around 1113 though, that Bollinger band may be right there too. (Bear in mind these potential ceilings are rarely exact ceilings - we want to watch closely anytime the indices are around major milestones.)

While Bollinger band are generally not part of our normal technical fare, they’ve proven to be reversal points for almost all the major trends since March of last year, or at least the guideposts in cases where a reversal did not immediately materialize. You can see this so some degree on the nearby chart, but to really appreciate how important these band lines have been over the last year and a half, check out this full-screen chart.

To be clear, we’re not saying the market’s going to rollover around the 1113-ish area; we’re just watching for it here, as if it’s going to happen at all, that’s the most likely pace for it to happen.

Indeed, if we had to venture a guess, based on momentum and earnings, we’d expect a brief pause there, and then look for the S&P 500 to gently push the upper band higher. It would be quite like the progress seen in November and March.

Let’s cross that bridge when we come to it though.

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In June, the total rail traffic - intermodal plus carloads - in the United States averaged a total of 515,000 units per week, which is just 1.3% below May’s total levels. It’s still easily more than 10% above June-2009’s levels.

And in the meantime, we’ve actually seen the weekly rail numbers jump back to the strong levels that were so encouraging for the first half of the year’s; last week’s 227,000 intermodal units and the 282,000 carloads sent within the United States were right in line with the recent average. The chart speaks for itself.

The third piece of data on the rail shipping chart is cumulative ‘ton miles’ figure. As it suggests, trains cars (all types) multiplied by distance delivered equals a ton-mile…. the more, the better. Last week’s 30.8 ton-miles is just a fraction lower than the four month average, which has barely even budged that whole time.

No, rail freight demand isn’t waning, whether one wants to believe it or not. Canada’s rail market has remained just as stable.

That being said, were it just railroad activity showing reason for optimism, it might be easy to dismiss it as an anomaly. Trucking demand has remained just as firm though. In fact, according to the Cass Report, total shipping volume as well as total freight expenditures have actually trended higher each month this year including a June increase - well after the point where most investors thought the double-dip recession had begun. (Or if it has begun, then this shipping demand is an outright miracle).

While the earnings numbers for the prior quarter don’t guarantee the same success in the next (or current) quarter, they certainly aren’t meaningless either. Check out some of the recent reports from the rail as well as the trucking industry:

• Werner Enterprises (WERN) generated a 65% increase in last quarter’s earnings
• Knight Transportation (KNX) posted a 26% increase in last quarter’s earnings.
• J.B. Hunt (JBHT) posted earnings of $0.40 per share last week, topping last year’s $0.23. Intermodal revenue was higher by 24%, on a 19% increase in volume.
• Union Pacific (UNP) announced record-breaking earnings of $1.40 per share, beating Wall Street’s estimate of $1.21. All six of its business segments (automotive, intermodal, chemicals, agricultural, etc.) saw improved revenue and earnings.
• Canadian National Railway (CNI) drove a 38% improvement of the prior second quarter’s per-share profit with income of $1.13. Analysts had only forecasted income of $0.99.
• CSX Corp. (CSX) netted $1.07 per share, topping an anticipated $0.98. Revenue was up 22%; volume increased by 13%.

As for what lies ahead, most of the companies mentioned they were optimistic about future growth. Even the ones that we’re looking for a way to contain expectations had to concede there was - for one reason or another - something positive ahead.

For instance, Werner’s spokespeople commented “the improvement in the freight market has more to do with the failure of other trucking companies rather than rising demand”, which is unfortunate for the failed companies, but ultimately of benefit to Werner.

J.B. Hunt’s President Kirk Thompson, President said “Demand for transportation services has increased fairly dramatically as we have emerged from a multi-year freight recession… Across all segments demand was solid throughout the quarter with no evidence of renewed weakness. Shippers increasingly have exhibited concern about the supply/demand imbalance as their ability to secure adequate capacity has become more difficult.”

Werner especially cited a lack of drivers and a lack of accessible capacity as challenges; both point to a growing - not shrinking - demand that will ultimately dive prices upward, as the supply can’t grow as fast.

On the railroad side of the table, Canadian National nor any of the other rail outfits has to say a thing about the supply/demand dynamic that’s causing earnings to grow. The fact that Canadian National raised 2010’s earnings guidance (again) to a full 25% increase over 2009’s net income says it all.

It’s time for the long-termers to start looking at these stocks; the business is there regardless of whether or not the economy is supposed to be headed towards a recession again. And if we do skip the double-dip, the sky’s the limit for truckers and railroads.

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Will this carry through into this week? Will this week’s slew of real estate data just spur the selling even further, trumping last week’s decent economic numbers? For that matter, will this week’s earnings data make all the other information irrelevant? Answers are below.

Economic Calendar

It was a heavy week on the economic data front, and though the market didn’t act so on Friday, there was at least some encouraging news.

The biggest alarm bell was sounded by the second monthly dip in retail sales - is the consumer really tightening his/her purse strings to the point that the economic rebound is stalling? They did so by 0.1% last month (or by -0.5% when factoring in auto sales).

On the other hand, the new unemployment claims number finally broke a long-standing streak of scores above 440K; they moved to 429K a week ago. Continuing claims haven’t followed suit yet, but bear in mind the actual unemployment rate has fallen from a peak of 10.2% in October to the current level of 9.5%. So, it’s not been a completely jobless recovery yet. It will be interesting to see if a downtrend is developing on the weekly claims front.

Friday’s implosion was at least partially kick-started by a sharp drop in the Michigan Sentiment Survey, from 76.0 to 66.5. The number lined up with a similar drop in the Conference Board’s consumer confidence figure for June. These numbers tend to mirror long-term market trends, so though it’s still a little too soon to jump to conclusions, it’s not too soon to start keeping close tabs on this data.

Economic Calendar

As for the coming week, much less data in on the schedule, though some market-movers are in the queue….. all on the real estate front. The National Homebuilders Index will be updated today, permits and starts for June will be unveiled on Tuesday, while existing home sales will be announced on Thursday (along with new and ongoing claims). The forecasted numbers all suggest the same thing though - the real estate market is again weakening rather than expanding.

NASDAQ Composite

Just to keep things fresh, this week we’re going to take a look at a chart of the NASDAQ rather than the S&P 500; it’s a little more telling anyway.

The bad news is plentiful, the biggest of which is the fact that the composite is back under all its key moving averages….. the 20, 50, 100, and 200-day moving average lines. In fact, it was the combined 50 and 200 day lines that halted the advance last week, and ultimately sent the NASDAQ careening again.

Moreover, a string of lower highs and lower lows since the April peak has new become clear. When will the pattern end? That’s the point - we have no specific reason to think it’s going to until we actually see a higher high, but that may not happen for a long time.

The good news is a little tougher to find, but it does exist.

The ‘best’ good news is the fact that - despite a major selloff in terms of percentages - Friday’s dip wasn’t really a high-volume wave of selling. As such, it doesn’t necessarily represent the majority opinion.

Also, the lower Bollinger band (50-day) is still intact as a support line. It’s at 2090 right now, which leaves room for the NAADAQ Composite to fall further, but interestingly, at least that lower Bollinger band is pointed upward now. (It’s admittedly a subtle nuance, but it represents a slightly-stronger support potential all the same.)

Bottom line? Let’s assume the Composite is trapped between 2090 and 2244 for the time being. That leaves room for a small downside trade, but the trend we really want to tap into will be above or below those boundary lines.

NASDAQ Composite

Earnings Calendar

Despite Google falling short of estimates, this earnings season so far has been a good one…. with more ‘beats’ than misses. In fact, since Alcoa kicked things off early last week, 69% of reporting companies have topped estimates, while 20% have fallen short (and 10% met estimates). That’s the normal beat/miss rate, so technically speaking, there’s really nothing to complain about in the aggregate.

That said, one should also keep in mind that just because Google fell short of the expected $6.52 per share by turning in only $6.45 per share, that doesn’t mean the company earnings are shrinking. Quite the contrary. Google still increased earnings, from $5.36 in Q2 of 2009, to that $6.45 number….. investors just chose to see the glass as half full.

The question is, which is more important in the long run? Hitting analyst estimates (which may be off base), or growing earnings?

Anyway, here are this week’s major earnings announcements.

Earnings Calendar

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1. All the major indices are back under the 20, 50, and 200 day lines; the 50-day averages are also under the 200-day averages…. the so-called ‘death cross’.

Stock prices are the final arbiter; if they’re under key moving averages (and they’re under all of them right now), it’s because investors haven’t thought they were worth owning in a while.

To be clear, whether they’re worth owning or not is irrelevant - a falling stock is a falling stock regardless of the reason; you simply don’t want to own it. And right now, the momentum is just perceived as bearish, so investors don’t want to touch them. (On the flipside, the ever-changing opinion on this matter has been flip-flopping a great deal of late… the reason for al the volatility.)

2. Confidence is falling again, which coincides with the beginnings of recessions and bear markets.

While one month’s worth of tumble in confidence levels isn’t a ‘trend’ that should prompt the sounding of alarm bells, all long-term trends start out as short-term trends. Therefore, the Conference Board’s consumer confidence reading as well as the Michigan Sentiment Survey should both be on everyone’s radar, as they both sank - precipitously - last month. If we see lower scores for two or three months in a row, odds are historically good that things will get bad

3. Things are so bad, rather than inflation - which we’re supposed to see materialize thanks to loads of cash - we’re seeing deflation, which is the ultimate sign of a lack of demand.

Despite tons of cash in the U.S. economic system, and despite stupidly-low interest rates, inflation has been contained to the point of being alarming. If consumers and business were even half-optimistic (or able), demand and prices for everything should be soaring. With last month’s dip in the inflation rate from 2.02% to 1.05%, deflation - a bigger problem than inflation - is a real worry. Why? It coincides with and typically exacerbates recessions.

Though deflation doesn’t technically occur until the inflation rate turns negative, the current trend is pointing us in that direction.

The bulls are saying…..

1. Unemployment is falling, even if at a snail’s pace.

Unemployment now stands at 9.5%, which isn’t leaps and bounds better than the peak of 10.2% from October of last year, but it is better. The problem on this front is more one of perception than reality - even the good numbers are tainted, with nay-sayers saying the numbers aren’t actually reflective of the true unemployment situation. Some of that argument is valid; most is not.

Either way, with new unemployment claims finally breaking their stagnation above 440K by falling to a multi-year low of 429K last week, the employment picture is still showing glimmers of hope. (At the same time, it’s worth mentioning that continuing claims haven’t trended higher since the beginning of the year. Granted, part of the reason could be the expiration of benefits for some; that’s only a small part of the reason for stability in the number though.

2. Earnings are getting better, again, even if at a snail’s pace.

Yes, Google fell short of earnings expectations, bringing home $6.45 per share rather than the estimated $6.52. However, that doesn’t mean profits shrank….. an important reality being overlooked by many. In Q2 of 209, Google earned 5.36 per share, so profits actually increased. Though that shortfall hurt GOOG shares in the short run, perhaps analysts were unfairly aggressive with their outlooks. Eventually, that earnings growth will be reflected in the stock’s price though.

A similar situation materialized for a couple of major banks. Citigroup and Bank of America both posted higher Q2 earnings results, thanks to significantly fewer loan losses. Deckling revenues, however, spooked investors out of those stocks. Not that falling revenue is something to dismiss, but which is more important - the bottom line, or the top line?

Ultimately, the market is still expected to grow net earnings from Q1-2010 to Q2-2010, and we should see earnings well above Q2-2009’s levels. The question is Q3 and beyond, but the trend now says Q3 should still be better than Q2.

3. Credit is becoming more available (and once again, even if it’s at a snail’s pace).

The lending market  hiccuped a few weeks ago. It was a short-lived hiccup though, and its rebound was already underway. Thus, the much-needed consumer was able to spend more freely again. We saw more evidence of the credit market thaw in the meantime.

Though still not back to early-2007 levels, borrowers who had not been able to get credit for quite some time are now able to again…. even in the subprime realm. Lenders are also in generally doing better keeping up with credit loans; only 5.5% were more than 30 days late as of the end of the second quarter, versus 6% from the second quarter a year ago.

So, qualified (and even unqualified) borrowers are showing interest in borrowing, while banks are showing interest in loans again. It’s still not ‘hot’, but it’s not freezing up again either.

So there you are - six specific things that will be major indications of whether or not we’re headed into a recession/bear market, or an economic growth phase/bull market.

Obviously all six are bigger-picture ideas that can’t be pinned down in a day. That’s why we’re going to keep tabs on all six (and more) over the coming weeks …so we can paint a clear picture of what’s really going on, and not get sucked into the short-term volatility that’s suckering everyone else into or out of the market (the folks who are flying by the seat of their pants, blindfolded).

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