Six Themes to Watch

 | Jun 07, 2013 | 12:56 PM EDT  | Comments
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Stock quotes in this article:

gps

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fran

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asna

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vra

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pvh

So what has to go right to maintain the momentum that started midday yesterday with that amazing reversal? What has to go right to prove that was indeed a "whoosh bottom" (as the late, fabulous Mark Haines called it), where everybody who needed to sell has sold and buyers are at last attracted to the market?

First, we need interest rates to stabilize, or to go up at a slower level, as the economy recovers. The employment report this morning was slightly better than expected, which could provoke a gentle rise in rates. Ideally, we want them back down, which is something that's hard to get if the economy is improving. But secondarily, we want the velocity of the move to abate. You can't have a rapid surge in rates without havoc occurring throughout the system, which is exactly what happened in the last month, when rates exploded higher even as they remain historically low.

You want to see us go back to new highs? Then we need to get interest rates back to where mortgages are below 4% so sidelined potential homebuyers can say, " Thank heavens, I didn't miss the bottom and I have to move now or I will never get another chance like this to buy." That would put us back on course for a prolonged housing recovery and all that goes with it. Still, though, just a cessation of the huge jump higher could do the trick.

Second, we have been getting some better-than-expected data from Europe. That's shocking in itself, but it confirms that not only has Europe bottomed, but it might also be showing actual improvement. So many of our companies have huge businesses overseas, and this would be a godsend for them.

Third, we need to see some stabilization in China. Europe could really help here because they take so many Chinese exports. For that to happen the potential trade war between China and Europe over solar panel dumping needs to be nipped in the bud.

Fourth, we have to get a sign that all is not lost in retail land. We got some hope last night when Gap (GPS) reported a good month, which showed us that Ascena (ASNA), Vera Bradley (VRA) and Francesca's (FRAN), three huge disappointers, might actually be outliers. After all, Gap is a gigantic nationwide chain that has a real good handle on business that these three other companies simply don't have. We will hear from PVH (PVH) next week. This apparel company is in every major department store and it provided continued momentum with a good report.

Fifth, we need to see some stability in commodities to verify that things around the world are getting better, not worse. I rely on iron ore, copper, aluminum and most important, lumber as signposts of improvement or deceleration. All of those have been terrible performers of late -- except lumber, which just started advancing. That's a terrific sign but the others need to follow.

Last, we saw our leadership groups come back today: aerospace, transports, techs, banks and biotechs -- the latter being the most visible sign of a better market. If those continue to build on today's advance, we have a fighting chance to say that we've seen the bottom and that the worst case scenario's off the table.

So those are six themes to watch for. Unfortunately, we need all six to go right if we are going to get back to where we were before the selloff began. But I would say four out of six would prove that the pivot we saw on Thursday was, indeed, a whoosh bottom. And that means, point blank, that the worst is over.

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