We are in a bear market, but stocks don’t seem to know that. We saw a very volatile, but all around incredible performance turned in last week, by all the major indices. The tech-laden Nasdaq added 4.5%, the Dow was next with 3.6% and the S&P 500 tacked on 2.9% and considering that the S&P 500’s gains were tabulated from the moves of five hundred stocks, that was an impressive performance that shows how broad-based last week’s rally was.

That however, was last week. As aforementioned, we are in a bear market. Furthermore, there are some negative overbearing issues that should have weighed in on the market last week that were completely ignored, we might have to account for that this week. These issues include:

• Russia invaded the independent country of Georgia and under normal trading circumstances, to the extent that Russia is a major energy producer, oil prices should have to some degree, been impacted, this was not the case last week. We should see some impact from Russia’s actions this week.
• While not entirely unexpected and not new news for those looking at things from a commonsense perspective, worries are now emerging that a weakening economy will not be limited to the U.S. and more specifically, investors are now concerned about the Eurozone, after European Central Bank President Trichet, forecasted that economic growth will be weak through the third quarter. Instead of stock markets tanking across the board, that is locally and internationally, the dollar was instead seen as a safe haven and rallied, which sent oil prices lower, which sent U.S stocks soaring. 

Looking ahead we have the following issues to deal with:

• We know the dollar can not continue in a straight line upwards, it could possibly put in another phenomenal bullish week this week, but at some point in the very near future, it will need to undergo a retracement. Since a weak dollar is good for oil, then maybe we can assume that the inverse holds true as well, thus any weakening in the dollar will send stocks lower.
• Several major mall stores and retailers including JCPenney (JCP), Kohl’s (KSS), Abercrombie &  Fitch (ANF), Macy’s (M), TJX Cos. (TJX), and Wal-Mart (WMT) will be reporting their latest quarterly earnings this week. It will be a major miracle if as a group, they all come out with earnings and future guidance that impresses Wall Street. To the extent that as retailers, their financial performance is a direct reflection of the state of the consumer, bad news out this week from the retailers is not something Wall Street could ignore. Then again, the street these past few weeks, has shown a propensity to not only ignore what should be considered bad news, but in some cases, even rewarding it.

On Sunday, Treasury Secretary Henry Paulson, appeared on NBC’s Meet The Press with Tom Brokaw. Tom Brokaw asked him whether the govt would put money into Fannie Mae (FNM) and Freddie Mac (FRE), below is a transcript:

Tom Brokaw - “You have the ability now to insert money into Freddie Mac and Fannie Mae, do you think that that’s gonna become necessary given the size of these losses?”

Henry Paulson - “Well we have no plans to insert money in either of those institutions. I think it was very important that we get these temporary back-up facilities because Fannie and Freddie are very important to our capital markets broadly. There’s $5 trillion dollars of securities that they have astounding, $3 1/2 trillion in the U.S. and $1 1/2 trillion outside of the U.S.and they’re responsible for funding about 70% of the mortgages in the United States  today and so a key to our getting through this housing situation, housing correction, and getting some stability, is that we continue having mortgage financing available.”

While we believe that despite the above comments, the government will do whatever is necessary to keep these companies afloat as they very well should, these comments should not be good for these two stocks this week, as traders may not be of the view that Paulson apparently  holds, which is that enough has been done already, to ensure Fannie’s (FNM) and Freddie’s (FRE) survival. If these stocks trend down by much, then they might drag down the other financial stocks as well.