This week most equity investors bid their farewell to the recession. Everyone from JP Morgan Chase to Merrill Lynch boldly announced not only that the recession is over, but that growth recovery has begun. Should they be using more caution?
Equity investors make their money by predicting the future. Future earnings growth, to be specific. Generally they are looking six to twelve months ahead of the present to determine which companies will be the leaders in generating income. Yet it was a look into the past that sparked equities higher.
Goldman Sachs and JP Morgan blew away Q2 earning per share expectations. This was all investors needed to assure themselves that the banking problems are behind and solid growth can be expected.
The news this week had disappointments with CIT announcing bankruptcy is imminent. Also, Bank of America declared that difficulties still lie ahead with problem loans. Investors did not blink an eye at these warnings and continued to buy heavily on the price dips.
Energy complex traders fed off the excitement in equities and the falling US dollar to drive crude, gasoline and distillate futures higher.
All indications point to the equity trader's optimism to be justified. Energy investors would be best served by accepting the recovery is coming and base trades on a bull trend strategy. Caution and patience will be needed in waiting for pull back down days and not to chase the market at daily highs.
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